Pros And Cons Of Mortgage Forbearance

Is mortgage forbearance a good idea? Homeowners who take advantage of this temporary arrangement are often experiencing financial hardship and need to temporarily pause their monthly mortgage payments to avoid late fees or loan default. It’s a financial lifeline for many, but what are some pros – and cons – of mortgage forbearance?

Mortgage forbearance can help you avoid foreclosure, but it can also have negative consequences for your loan, home and credit score. It’s important to weigh the pros and cons of mortgage forbearance to decide whether it’s right for you.

Mortgage forbearance is temporary financial relief for homeowners that lets them stay in their homes and pause their monthly payments until they can get back on their feet. For many homeowners, forbearance helps them avoid foreclosure. But, as with many decisions relating to real estate, forbearance has pros and cons.

There are a few reasons why a homeowner may need mortgage forbearance. A common reason is job loss. If you lose your job and can’t afford your mortgage, you can apply for mortgage forbearance to maintain homeownership without breaching the mortgage loan’s terms. Forbearance may negatively impact your credit, but it can help you avoid foreclosure, which may be even more damaging to your credit score.

If you’re facing an ongoing financial hardship, call your loan servicer. Explain the situation to them before you ever miss a payment. If you decide to apply for forbearance, your mortgage lender may request some documentation and information, including:

• Details on your monthly take-home pay
• An itemized list of your monthly household expenses
• Any applicable unemployment benefits
• An overview of the financial hardship you’re facing and its cause
• Information on when you expect the financial hardship to be resolved
• Documents that substantiate your claim of financial hardship

CARES Act Adjustments To Requirements

The CARES Act is federal legislation that provided help to individuals economically impacted by COVID-19. As part of the CARES Act, eligible homeowners facing economic hardship could request forbearance and receive mortgage relief for up to 18 months. And their property wouldn’t be foreclosed on during the forbearance period.

For many homeowners, the enrollment period for mortgage forbearance was open through September 30, 2021. If you received an extension, check when your extension period expires so you’re prepared to begin repaying the payments you missed during forbearance.

If you’re still having trouble making your monthly mortgage payments, see what your loan servicer offers. Given the economic fallout from the pandemic, many servicers began expanding their forbearance and loan modification options to help homeowners. Speak with your servicer about the status of your loan and see if you qualify for any mortgage help.

Mortgage forbearance offers several advantages, including the ability to work with your lender to create a plan that fits your budget and helps get your monthly budget back on track.

Avoid Foreclosure

The difference between forbearance and foreclosure is significant. Foreclosure is a legal process where a bank, credit union or other financial lender takes possession of your property because of missed payments. It’s a last resort for lenders that can happen if you miss too many payments.

Forbearance is an agreement between a homeowner and a lender that allows the homeowner to pause mortgage payments temporarily.

Once the grace period ends, homeowners must resume their mortgage payments and pay back the outstanding balance from the forbearance period, including any interest or fees.

It’s important to note that you don’t always have to pay the back payments at once. You may qualify to defer a certain number of payments until the loan is paid off, or you may qualify for a repayment plan that adds a certain amount to your monthly mortgage payment each month until the back payments are paid off.

The cost of foreclosure is higher for homeowners and lenders than the cost of forbearance. As a result, many homeowners opt for forbearance to stay in their homes and avoid foreclosure.

Maintain Residence

Stable housing is as critical as getting a new job to get back on your feet. The Mortgage Bankers Association found that hundreds of thousands of borrowers have exited forbearance and regained financial stability within the past year. Mortgage forbearance means you don’t have to give up your home while you get your finances back on track.

Create Lender Goodwill

Mortgage forbearance allows you to work with your loan servicer to address your concerns about your mortgage. If you choose forbearance, you’ll show your mortgage provider you’re serious about keeping your home. Your choice may make the servicer more likely to work with you in the future if you run into financial trouble again.

Of course, mortgage forbearance also has downsides, including higher payments and potential dings to your credit score. That doesn’t mean forbearance is bad. But let’s take a look at the downsides of mortgage forbearance.

Lender Entitlement In Case Of Home Sale

If the sale of a home is allowed under the terms of a forbearance plan, state lenders will recover your missed payments from the sale of your home. Any amount owed to your lender becomes payable from the sale of your property. Forbearance does not reduce your balance owed and may actually increase the total outstanding. Amounts deferred under forbearance are still owed to the lender.

Higher Payments Later On

Forbearance allows homeowners to find a repayment option (lump sum, repayment plan, modification, etc.) that works for all parties and provides much-needed financial relief. Once the forbearance period ends, you’ll resume your monthly mortgage payments, including the payment of any reduced or skipped payments during the grace period. You should also prepare for the possibility of higher monthly payments and a higher interest rate after the forbearance period ends. Attempts to refinance could also be difficult, as lenders and investors may require you to have completed your workout plan post-forbearance to be eligible for a new mortgage.

Negative Effects On Your Credit

Unless your loan servicer specifies otherwise or you were aided by the CAREs Act, they will report your mortgage forbearance to the credit bureaus, which can lower your credit score because it shows a period when you weren’t making mortgage payments. Future lenders may consider your mortgage forbearance when assessing your creditworthiness and may charge higher interest rates because of the financial difficulty you experienced in the past.

If you can make your monthly mortgage with a little belt-tightening, you may want to pursue that avenue rather than apply for mortgage forbearance. And if you believe your financial trouble may last for more than a year and don’t see your prospects improving anytime soon, you may need a longer-term solution than forbearance.

Mortgage forbearance is a short-term, cash-saving strategy that won’t work for everyone. Here are some alternatives to mortgage forbearance you may want to consider:

• Asking for help from friends and family
• Considering a no-closing-cost refinance
• Reassessing tax deductions to increase monthly income
• Talking to your lender about other mortgage relief options

Mortgage forbearance can be a financial lifeline when you find yourself facing unexpected hardship. It provides a lender-approved pathway to avoiding foreclosure and getting caught up with your mortgage payments.

Remember, mortgage assistance can take many forms. You should consider all your options before you settle on a solution.

If you’re a Rocket Mortgage^® client experiencing financial distress, we’re here to help. Sign in to your Rocket Account and fill out our Application For Success. A representative will contact you to discuss the mortgage relief options we offer.