If you're currently in forbearance, you may be wondering, “Can I sell my house while in forbearance?” We answer that and more below.
Forbearance periods are intended to be a temporary fix to help homeowners struggling to pay their mortgages to avoid foreclosure. Homeowners typically need to provide documentation of their financial hardship to qualify for a mortgage forbearance, but this requirement isn't necessary during the COVID-19 pandemic. The Coronavirus Aid, Relief and Economic Security (CARES) Act of 2020 has greatly affected options for disaster-related suspensions of mortgage payments, depending on whether a homeowner’s mortgage is from a government or private home equity or mortgage lender.
Homeowners can sell their homes while they are still in forbearance, although the full amount owed to the mortgage lender will become payable upon the property’s sale. The consequences of forbearance become more uncertain for homeowners who are buying property.
Below, we’ll review important considerations for selling a home in forbearance.
CARES Act
The CARES Act is a $2.2 trillion economic stimulus package that went into effect on March 27, 2020. Many homeowners are taking advantage of it by obtaining forbearances and other types of debt deferrals, resulting in a number of unintended consequences. One of the most significant of these is that people who sell a house often do so with the intention of buying another one, which may not be possible if a forbearance is in effect.
Credit Report
You may wonder, “Will forbearance affect my credit?” A mortgage forbearance program doesn't directly affect your credit score rating because lenders must report you as current on your loan even though you're not making any monthly payments. However, simply stopping your monthly mortgage payment without notifying your mortgage lender will seriously harm your credit and leave you at risk for foreclosure, even when you're legally entitled to a forbearance. For this reason, it's vital that you receive official notification of the mortgage forbearance program before you, as the borrower, stop mortgage payments. If you can no longer afford your monthly payment, work with your lender to see if a deferment or loan modification can take place. If you can’t get a loan modification, you may be eligible for a short sale, where you can sell your house for less than what you owe, but you are required to get your mortgage servicer’s approval.
Sale Complications
Selling a house under the forbearance program isn't a problem in itself, but buying the next one can present a huge challenge. Homeowners must be able to qualify for a mortgage on the new house before they put a house with a forbearance up for sale. This might be difficult if the proceeds from the sale of the old house aren't sufficient to buy the new house outright. Sellers should get preapproved for the new mortgage and otherwise ensure there aren’t any obstacles to the purchase of a new house before listing a property for sale. The last thing you want is to find out you can't buy a new house after you're already under contract to sell the old one.
Government mortgage lenders like Fannie Mae and Freddie Mac haven't yet disclosed the details of how they plan to handle deferral payments on forbearances when a property sells. This lack of guidance has created uncertainty when it comes to underwriting a new mortgage for the prospective home buyer with a payment forbearance plan.
Summary
Be extremely cautious about selling a house while the mortgage is in forbearance, because a sale may affect your ability to buy a new home. Talk to your lender or loan servicer to find out whether you would qualify for a new mortgage. You can learn how the lender or loan servicer would handle the deferral monthly mortgage payment on a forbearance plan in the event you do sell your property. It is also important to have a repayment plan ready. Only then can you, as the borrower, be confident that selling your home will not have unforeseen negative consequences.
