Pros And Cons Of Mortgage Forbearance
Victoria Araj6-minute read
February 20, 2023
Is mortgage forbearance a good idea? What are some pros and cons? A mortgage forbearance allows homeowners experiencing hardship to temporarily pause making monthly payments and avoid late fees on their loans.
It’s a timely question to consider, as roughly 3 million borrowers have fallen behind on their mortgage since March 2020, and 2 million have enrolled in forbearance plans, according to the Consumer Financial Protection Bureau.
After all, while life happens, mortgage forbearance (which can provide a safeguard against larger financial hiccups, but with a possible impact to one’s credit score in most instances) provides a means through which to maintain homeownership without defaulting on loan requirements. Noting this, it’s important to consider the pros and cons – and if mortgage forbearance is right for you.
Is Mortgage Forbearance A Good Idea?
Mortgage forbearance is a form of temporary financial relief that allows homeowners to stay in their homes and pause their monthly payments while they get back on their feet. For many borrowers, forbearance provides a solution that can help them avoid foreclosure. In effect, forbearance provides a lender-approved means through which to temporarily reduce or suspend monthly mortgage payments for a short-term basis. However, as with many common real estate-related decisions, it comes with pros and cons, including potential impact to your credit score and report.
For example: First-time homeowner Jean, has recently become unemployed due to cutbacks at her company. Facing trouble paying her bills and meeting monthly financial obligations, she may wish to apply for mortgage forbearance as a means of maintaining homeownership without breaching the terms of her loan. Although doing so may come with an impact to her credit, it can help her avoid potential foreclosure, which could be even more damaging to her credit score.
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Mortgage Forbearance Requirements
Facing an ongoing financial hardship? Make a point to call your servicer, the entity you make your payments to, today and tell them of the situation before you run the risk of facing missed payments. If you wish to apply for forbearance, your mortgage lender may request some important documentation and information, including:
- Details on your monthly take-home pay
- An itemized list of your monthly household expenses
- Any applicable unemployment benefits information
- An overview that explains the current financial hardship that you’re facing and its cause
- Information on when you expect current financial challenges to be resolved
- Any documents that substantiate your claim of financial hardship
CARES Act Adjustments To Requirements
Federal legislation called the CARES Act provided help to individuals economically impacted by COVID-19. As part of the CARES Act, home loan borrowers who were facing economic hardship could request forbearance and receive mortgage relief for a maximum term of up to 18 months, provided that they met certain eligibility requirements. In addition, for the duration of this forbearance period, their property wouldn’t be foreclosed on.
For many borrowers, the enrollment period for mortgage forbearance was open through September 30, 2021. Be sure to check your specific dates and know when your extension period expires so you’re prepared to begin making up the missed payments during forbearance.
Should you find that you’re having trouble making monthly mortgage payments, many servicers (noting the hardship that families may be facing) are now offering forbearance and loan modification options. If you have questions regarding whether you qualify and your loan’s status, be sure to speak with your servicer.
Pros Of Mortgage Forbearance
The difference between forbearance and foreclosure is significant. Foreclosure (a last resort for lenders) is a legal process under which you forfeit rights to your home and a bank, credit union, or other financial lender takes possession of the property due to nonpayment. Forbearance is an agreement made between you as the homeowner and your lender that allows you to seek temporary relief, after which you must continue making payments.
At the time the grace period ends, you must also pay back any outstanding balances accrued in addition to any interest or fees that accumulated during the forbearance period.
It’s important to note that you don’t always have to pay it all back at once. You also may qualify to defer a certain number of payments until the loan is paid off or you might qualify for a repayment plan where a certain amount is added to your payment every month until the back payments are paid off. Finally, loan modification changes the terms of your loan permanently to help you avoid foreclosure.
The costs of foreclosure to both homeowners and lenders are significantly more than those associated with forbearance – as a result, many borrowers opt to apply for forbearance as a means to stay housed and keep foreclosure at bay.
Having stable housing is important as you work to get back on your feet. In fact, hundreds of thousands of borrowers have already found ways to exit forbearance and regain financial stability within the past year, according to the Mortgage Bankers Association.Mortgage forbearance means you can remain in your residence while getting your finances back on track.
Create Lender Goodwill
Mortgage forbearance provides an option to actively work with your servicer to address possible finance-related concerns. Opt for it in lieu of a foreclosure, and you’ll show good faith to your mortgage provider, who may be more amenable to working with you again should hardship strike in the future.
Cons Of Mortgage Forbearance
Of course, mortgage forbearance can also come with some downsides attached, including higher payments and potential dings to your credit score. But is forbearance bad? Let’s take a look at the negatives of mortgage forbearance.
Lender Entitlement In Case Of Home Sale
Financial lenders can recover missed payments from funds generated from the sale of your home, if the sale of a home is allowed under the terms of a forbearance plan. In essence, any amounts owed to your lender become payable upon the sale of your real estate property.
Higher Payments Later On
As a borrower, forbearance affords you the opportunity to work with servicers, who may offer you a repayment option (lump sum, repayment plan, modification, etc.) that works for all parties and provides much-needed financial relief. However, your home mortgage loan (including any reduced or skipped payments) will still need to be paid once your forbearance plan ends. Bearing this in mind, it’s not uncommon to expect higher monthly payments to kick in at the end of the forbearance period.
Can Hurt Your Credit
Unless otherwise specified, a mortgage forbearance will be reported to the credit bureaus by your loan servicer. If this occurs, it may potentially lower your credit score as a borrower, as it essentially amounts to a period of your credit history in which bills have (albeit temporarily) gone unpaid. Loan servicers (financial lenders such as banks, credit unions and online lenders) who see an instance of forbearance on your record may see you as a borrower who presents higher risk of defaulting on a loan.
Alternatives To Mortgage Forbearance
If times are tight, but you’ve got the money to pay your monthly mortgage with a little belt-tightening, you may wish to skip applying for mortgage forbearance. Similarly, it’s not a good idea to dive right into it if you expect to be cash-strapped for more than a year, and don’t see your economic prospects improving over time. Noting that this short-term cash-saving strategy won’t be for everyone, some possible alternatives to mortgage forbearance that you may also wish to consider include:
- Asking for help from friends and family
- Considering a no-closing-cost refinance
- Reassessing your tax deductions
- Talking to an expert who may be able to present other options
The Bottom Line: Talk To Your Servicer
Mortgage forbearance can prove a helpful tool to lean on if you find yourself in an unexpected hardship. In effect, it provides a lender-approved pathway toward avoiding foreclosure and getting caught up on mortgage payments. Millions of families have already turned to forbearance as a way to help get their finances back in order and create a plan for resolving any outstanding mortgage balances.
However, at the same time, mortgage forbearance isn’t a one-size-fits-all solution and may not make sense for your individual situation or be applicable to your home loan type.
Remember that there are many ways to receive mortgage help – be sure to consider them before you settle on a preferred solution in your time of financial hardship.
If you’re a Rocket Mortgage® client experience in financial distress, we’re here to help. Fill out our Application for Success so someone can contact you about any options that may be available to you.
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