Unexpected life events, like a job loss or a medical emergency, can put a strain on your finances, making it difficult to meet your mortgage payments. In such situations, skipping a payment or two may seem like an attractive option. But is it possible? This article will explore loan forbearance, how it works, and whether it’s a viable solution for you.
What is Loan Forbearan
Loan forbearance is a temporary agreement between a borrower and a lender, allowing the borrower to reduce or pause their mortgage payments for a specified period. This arrangement aims to provide relief to borrowers facing financial hardships, giving them time to recover and regain their financial footing.
2. Reasons for seeking forbearance
Borrowers may seek forbearance for various reasons, including:
- Job loss
- Reduced income
- Medical emergencies
- Natural disasters
- Other unforeseen financial hardships
How Does Loan Forbearance Work?
1. Application process
To request loan forbearance, borrowers must contact their mortgage servicer and provide documentation to support their financial hardship claim. Each lender has its own application process, and approval is not guaranteed.
2. Length of the forbearance period
The length of the forbearance period varies depending on the borrower’s situation and the lender’s discretion. Typically, forbearance periods last from three to twelve months, and in some cases, can be extended further.
3. Types of forbearance
There are two main types of forbearance:
- Payment reduction: The borrower pays a reduced mortgage payment during the forbearance period.
- Payment suspension: The borrower is allowed to pause their mortgage payments entirely during the forbearance period.
The Implications of Loan Forbearance
1. Impact on credit score
While forbearance itself may not directly impact your credit score, it can still have indirect effects. For example, if you’re behind on your mortgage payments before entering forbearance, your lender may report your delinquency to the credit bureaus, potentially harming your credit score.
2. Interest accrual
During the forbearance period, interest continues to accrue on your mortgage. At the end of the forbearance period, the accrued interest will either
be added to your loan balance or included in a repayment plan, potentially increasing your future monthly payments.
Alternatives to Loan Forbearance
If loan forbearance isn’t the right fit for your situation, consider exploring these alternatives:
1. Loan modification
A loan modification involves changing the original terms of your mortgage, such as extending the repayment term, reducing the interest rate, or even forgiving a portion of the principal balance. This option can help lower your monthly payments to a more manageable level.
Refinancing your mortgage means replacing your existing loan with a new one, typically with a lower interest rate and/or a longer repayment term. This can help reduce your monthly payments, but it may come with additional costs, such as closing fees and a potential impact on your credit score.
3. Payment deferral
Some lenders offer payment deferral programs, allowing you to postpone a limited number of mortgage payments and add them to the end of your loan term. This option can provide temporary relief without the long-term implications of forbearance.
Pros and Cons of Loan Forbearance
Before deciding on loan forbearance, weigh the pros and cons:
- Temporary financial relief
- Potential to avoid foreclosure
- Time to regain financial stability
- Interest continues to accrue
- May affect future borrowing opportunities
- Possible impact on credit score
Mortgage Forbearance and COVID-19
1. The CARES Act
In response to the COVID-19 pandemic, the U.S. government passed the CARES Act, which provided relief to homeowners with federally backed mortgages. Under this act, eligible borrowers could request forbearance for up to 180 days, with a possible extension of another 180 days.
2. Post-CARES Act forbearance options
Although the CARES Act provisions have expired, many lenders continue to offer forbearance options for borrowers affected by the pandemic. Reach out to your mortgage servicer to discuss available options and eligibility requirements.
Loan forbearance can provide temporary relief for homeowners facing financial hardship, allowing them to reduce or pause their mortgage payments. However, it’s essential to understand the potential implications, such as accruing interest and possible credit score impacts. Explore all available options and consult with your mortgage servicer to determine the best course of action for your situation.
Can anyone request loan forbearance?
Not everyone qualifies for loan forbearance. You must demonstrate financial hardship and provide documentation to support your claim. Approval is at the lender’s discretion.
Does loan forbearance affect my credit score?
Loan forbearance itself may not directly impact your credit score, but if you’re already behind on payments before entering forbearance, your lender may report your delinquency, potentially harming your credit score.
What happens after the forbearance period ends?
Once the forbearance period ends, you must resume making your mortgage payments. You may also need to repay the missed or reduced payments, either as a lump sum, by increasing your monthly payments, or by extending your loan term.
Can I sell my home during the forbearance period?
Yes, you can sell your home during the forbearance period. However, you must pay off the outstanding mortgage balance, including any accrued interest, at the time of sale.
Can I refinance my mortgage while in forbearance?
It may be challenging to refinance your mortgage while in forbearance, as some lenders may consider you a higher risk borrower. It’s best to discuss your refinancing options with your current mortgage servicer or other potential lenders to determine your eligibility and the best course of action.
Remember that while loan forbearance can provide temporary financial relief, it’s crucial to carefully consider all available options and potential implications. Be proactive in addressing your financial situation and maintain open communication with your mortgage servicer to find the best solution for your needs.
Have high interest debt and want to consolidate it?
Start your application for a Cash out Refinance and use your equity to consolidate debt, and reduce your total monthly expenses.