What would happen to your home if you faced a financial hardship such as losing your job? If you have a mortgage and can't keep up with your monthly payments, you could be in trouble. Missed payments can lead to foreclosure proceedings, and you could lose your home. Luckily, there are options that can help you keep your home.
What is mortgage forbearance?
Mortgage forbearance provides homeowners a way to temporarily pause or lower mortgage payments when facing financial setbacks.
If you lose your job or have some other type of financial hardship, making ends meet can be difficult. Before you miss any mortgage payments, you should talk to your lender about mortgage relief options.
Mortgage forbearance is a temporary period – usually 12 months or less – where you can either make lower payments or completely skip your monthly mortgage payment.
How does mortgage forbearance work?
Mortgage forbearance is a process that begins when you contact your lender for assistance. The process follows certain guidelines which may be affected by your and you’ll likely be required to fill out an application.
While the terms of mortgage forbearance may vary based on your personal situation and your lender, you can expect these basic steps.
- Contact your lender to let them know about your financial hardship. Depending on your lender, this can be done online, or by phone, fax, email or postal mail.
- You may be required to fill out an application and provide documents to determine your eligibility.
- If your request is approved, your lender will provide you with a statement outlining the terms of your forbearance.
- When you’re nearing the end of your forbearance, your lender will contact you to discuss how you’ll proceed with your mortgage after the forbearance. Your lender may provide a variety of options so you can successfully continue your mortgage agreement, such as deferred payments, loan modification, increased payments or forbearance extension.
How the CARES Act has affected mortgage forbearance
The effects of Coronavirus have had far-reaching impacts on unemployment and a wealth of other financial difficulties for many Americans. Forced closures of companies in practically every industry have resulted in layoffs, termination and furloughs.
The Coronavirus, Aid, Relief, and Economic Security (CARES) Act, passed on March 27, 2020, includes a provision for homeowners who are financially impacted by COVID-19 and having difficulty making mortgage payments. The CARES Act extends mortgage relief options to homeowners with FHA, USDA, VA, Fannie Mae and Freddie Mac loans l who are facing financial hardship due to the Coronavirus pandemic. .
The CARES act also eliminates certain risks typically associated with mortgage forbearance. For instance, borrowers aren't required to show proof of financial hardship when applying. Additionally, if you receive mortgage forbearance due to financial hardship related to the Coronavirus, your credit score will not be affected by the deferred payments. Borrowers can receive a forbearance of 180 days and have the option to get an extension for up to an additional 180 days.
The pros and cons of mortgage forbearance
While mortgage forbearance can offer relief during a difficult situation, it’s important to carefully weigh the benefits of mortgage relief against the potential risks before deciding if it's the right option for you. Here are a few of the benefits and potential downsides of mortgage forbearance.
Benefits of mortgage forbearance
- Foreclosure proceedings will be halted.
- You can continue to make payments to keep your mortgage current when you have the funds.
- Depending on your lender, mortgage payments can typically be suspended or lowered for at least 3 months.
- If you can’t make a lump-sum payment to cover your missed payments once your forbearance period ends, your lender may be able to find other programs to bring your loan up to date.
- You can sell your home during the forbearance period without missing payments, which means your credit won't be affected.
Potential disadvantages of mortgage forbearance
- Mortgage forbearance is not mortgage forgiveness. You will be required to make up missed payments.
- Your mortgage payments may be higher after forbearance.
- Your delinquent payments may affect your credit score. However, mortgage forbearance that falls under the CARES act will not affect your credit.
- You might not be able to refinance your loan for a period of time after your forbearance, which could be a problem if you're having problems making those higher payments.
6 reasons homeowners might need mortgage forbearance
Seeking mortgage relief is one way to avoid losing your home if a foreclosure is impending. However, it's not the best solution for every situation. You’re required to make up missed or partial payments, which means a heavy financial load in the future. Mortgage forbearance might help you in the following situations.
- You were furloughed but are expected to return to your previous position and salary within 12 months.
- You lost your job but you're actively seeking new employment that will allow you to comfortably continue your mortgage payments.
- You're experiencing temporary medical issues.
- You need to stop the foreclosure process and have time to achieve financial stability before continuing your regular mortgage payments.
- You're experiencing a temporary financial setback due to COVID-19, but you have a reasonable expectation that you may be able to repay missed payments.
- The death or illness of a co-borrower leads to financial difficulties.
Is forbearance the right solution for you?
Mortgage forbearance is one potential solution to pausing your mortgage responsibilities while you take steps to stabilize your finances. Ideally, a mortgage forbearance should be avoided if possible since you are only delaying payments. Consider these factors before you apply.
Do you have other options?
When compared to simply defaulting on your loan or facing foreclosure, mortgage forbearance is a good option. Still, keeping your payments current is the best thing you can do for your financial future. Before applying for mortgage forbearance, consider these ways to get through a temporary financial setback.
- Make budget cutbacks. If you can make personal financial cutbacks to afford your mortgage, it's the best financial option you can make.
- Borrow from friends or family. If you can borrow money from someone close to you, the terms of your mortgage and credit score will be unchanged.
- Ask your lender if forbearance is the right solution for your personal situation. Mortgage forbearance is a temporary solution. If you're having long-term difficulties paying your mortgage, refinancing or loan modification may be a better solution.
Your credit may be temporarily affected
While the CARES Act requires lenders to report your payments as deferred instead of late or missed, your ability to get credit may be impacted. If you're planning to make a significant purchase shortly after your mortgage forbearance ends, you may have difficulty proving your credibility as a borrower. A lender will most likely expect to see you've made up your forbearance. This may not seem like an issue, but if the payments are deferred to the end of your loan, it could take years to accomplish.
Can you create a repayment plan?
Temporary and permanent job loss has affected millions of people due to closures related to the Coronavirus. Still, when your mortgage forbearance period ends, you'll have to repay the payments you've missed. This could mean making higher mortgage payments, adding an additional payment to your existing mortgage payments or extending the length of your mortgage term. Discuss your options for repayment with your financial advisor before signing on the dotted line. Making promises you can't keep could leave you facing foreclosure in the future.
If you're facing a temporary financial setback that makes paying your monthly mortgage payments impossible, don't resign yourself to defaulting on your mortgage and potentially losing your home. Speak with a Customer Assistance Specialist to learn more about mortgage forbearance and other forms of mortgage relief.