It’s a common belief that forbearance can provide financial relief to homeowners, and while that might be the case, it only actually helps for a short period. You’ve probably heard of many people applying for temporary mortgage relief due to COVID-19, allowing them to pause their mortgage payments for a set period. Whether you’ve lost your job, going through a divorce, or are financially suffering due to COVID-19, forbearance can be a suitable option.
Many people going through financial hardship choose the route of forbearance to lessen the burden; however, you may need to ask yourself if suspending or reducing your monthly mortgage payments is the best way to deal with your issue? That’s why it’s crucial to understand the basics of forbearance and its long-term impact on your financial stability. Keep reading to find out everything you need to know when it comes to forbearance.
Forbearance is an agreement between you and your mortgage lender that temporarily reduces or pauses your monthly loan payments. Typically, people request forbearance to prevent foreclosure, as they require financial assistance for a short period or temporary financial hardship. The key to forbearance is that it is temporary. The length of time that a lender will provide a borrower with relief will vary; however, following the forbearance, the homeowner will be required to repay the payments they missed based on adjusted terms decided on by the lender.
Typically, the mortgage lender will decide upon the best course of action, depending on each individual’s financial situation.
It’s important to note that not everyone qualifies for mortgage forbearance. Other options to prevent foreclosure exist, such as loan modification, refinancing the loan, debt settlement, and so on, these options may harm your credit score.
If you happen to miss a mortgage payment, the lender is obligated to report it, which will negatively affect your credit score. If you see this happening, you should immediately contact your lender to discuss your situation and the available options, including forbearance. Once you meet with your lender to explain, they will evaluate your case and provide you with an answer on whether you qualify. If you are eligible, they will then set up an appointment to go over the terms and conditions of the forbearance, including:
Although the mortgage payments may be at a halt, the loan will continue to accrue interest, for which you will continue to receive monthly statements.
Following the initial meeting with your lender and after agreeing upon the mentioned terms and conditions, you will be given a grace period that generally lasts up to 90 days; however, depending on your financial situation and on your lender, it could last up to 180 days or more.
During the forbearance period, your lender or mortgage company cannot initiate foreclosure, so rest assured, you will not lose your home. However, you are obliged to resume monthly payments immediately following the forbearance period, which will include the principal, interest, taxes, and insurance. Your repayment options may be modified and look like the following:
However, the above options may not be available to you. Although forbearance will help you avoid foreclosure on your home, you and your lender will need to determine if you qualify for forbearance, how long it will be, and how much your payments will be reduced by. You will then need to discuss the terms of repayment as you may even be required to repay the lender at a higher interest rate or in a lump sum.
During what we would call “normal times,” a mortgage forbearance has the potential to negatively impact your credit score as it can be recorded on a borrower’s credit report. Although the lender is not obligated to report it, they are capable of doing so. However, due to the current world situation, mortgages that are in forbearance as a result of any financial hardship from the COVID-19 pandemic cannot be reported to the credit bureaus. Given that, you must be able to prove your financial hardship is a result of COVID-19.
Forbearance may be a temporary solution; however, following the forbearance period, you will be required and expected to pay back the missed payments. If you believe your situation will require long-term financial aid, you may want to explore all available options. Contact I Will Buy Your House if you need to sell your house with a quick and straightforward process.