Homeownership is a big financial decision that people do not often enter into lightly. But even when you have planned carefully to ensure that you are making a responsible financial decision and buying a house with affordable payments, life can throw a wrench into your plans.
Whether you’ve suddenly lost your income, suffered a medical setback, or a natural disaster has shut down businesses in your region, unforeseen circumstances can affect your ability to make monthly payments. In cases like these, you may need to seek assistance to ensure that you can keep your house and preserve your credit score.
What Is Forbearance?
If circumstances outside your control change your financial outlook, you may be eligible for mortgage forbearance. Once you’ve entered into a forbearance plan, your lender agrees not to collect your mortgage payment for some time. Although most lenders limit the forbearance period to a year, they may be willing to extend the forbearance period beyond that timeframe.
Payments skipped during the forbearance period need to be paid eventually. Most lenders agree to collect the payments over three to 12 months, although the repayment period can be negotiated with the lender.
A forbearance plan is suitable for situations in which the borrower believes that the financial hardship will be short-lived and they will be in a more fortuitous position later on. Since the borrower will need to make larger than usual payments at the end of the period, the borrower will need to ensure that funds will eventually be available to catch up on the missed payments.
Benefits of Mortgage Forbearance
There are multiple advantages to relying on a mortgage forbearance plan.
No Accrued Interest
Unlike other assistance options such as deferments, during the forbearance period, the mortgage does not accrue interest on the balance of the loan. This means that the balance is not growing during the deferment period.
Repayment Can Happen Over a Period of Time
At the end of the deferment period, the missed payments can be repaid over months. This means that there is not a large balloon payment due at the end of the period.
Does Not Negatively Affect Your Credit Score
Because the lender agrees to stop collecting the mortgage payment during the forbearance period, missed payments do not negatively affect your credit score. If you skip payments without having a forbearance agreement, each missed payment is a negative mark on your credit score. These marks will affect your ability to obtain loans or receive better interest rates in the future.
Negatives of Mortgage Forbearance
Forbearance is not without its disadvantages. Below are three common problems you may run into as you go through the steps of a mortgage forbearance plan.
Payments Still Need to Be Made
Though you may have several months to get current on your mortgage payment, you’ll still need to get caught up on your payments eventually. This may mean paying double payments on your mortgage for up to a year after the end of the forbearance period.
Can Affect Refinancing Eligibility
Loans in forbearance may not be eligible for refinancing, which means you may miss out on occasional drops in interest rates that would benefit you — especially if your mortgage period is 15–30 years.
Harder to Access Equity
Along with an inability to refinance, you may not be able to access the equity in your home through a home equity line of credit. Lenders may be hesitant to create lines of credit for people not paying their primary mortgage.
How Do You Obtain a Mortgage Forbearance?
You can go through the following steps to enter into a mortgage forbearance plan.
1. Contact Your Lender
The first step to obtaining mortgage forbearance is to contact your lender and ask. Though sometimes the government intervenes during natural disasters or pandemics, you’ll still need to get final approval from your lender to enter into forbearance.
2. Provide Proof of Financial Hardship or Another Qualifying Event
Unless your forbearance request is based on your region, such as in the event of a natural disaster, your lender may request documentation of the circumstances leading to your request. Being prepared to provide documentation can lead to a smoother process and faster approval.
3. Prepare for the Eventual Settlement of the Missed Payments
During the forbearance period, if possible, you should be saving money to prepare for the eventual settlement of the payments.
Forbearance is not the same as forgiveness. You will still be on the hook for the payments after the end of the forbearance period. Saving any extra money you have or the money that would have gone towards mortgage payments will put you in a better position at the end of the period.
4. Consider Your Long-Term Plans
You will also need to consider your long-term plans along with your forbearance plan.
If you will be unable to catch up on payments at the end of the forbearance period, you may consider selling your home before the period ends. Look at your circumstances as well as the general housing market to make the best choice for yourself and your family.
You may want to speak to a financial counselor who can help you investigate your options and guide you toward the best solution.
5. Make Sure to Document All Agreements With Your Lender
Though your lender will probably reach out to you when your forbearance period ends, you should also keep track of agreements and forbearance periods to make sure you are prepared at all times.
Other Important Considerations
Before looking into forbearance, you should be aware of your circumstances and how long you think your financial hardship will last. If your hardship is due to the loss of a job or a short-term medical condition, evaluate how much you will make or how much you will be able to work when the condition passes.
Are there other options that may be a better fit for your financial future? Consider selling your home and downsizing or benefiting from a sale-leaseback. During and after the deferment period you should look at all your options to ensure you are making the best decision for your finances.
Forbearance can be a lifesaver in the right circumstances. If you can obtain forbearance on your mortgage, the act could preserve your financial future. However, forbearance should not be entered into lightly. Consider the pros and cons of putting your mortgage into forbearance along with the alternatives at your disposal. Talk to a financial advisor to learn if this is the best solution for your needs.