Pros And Cons Of Mortgage Forbearance
Scott Steinberg6-minute read
June 28, 2021
Is mortgage forbearance a good idea? What are some pros and cons? A mortgage forbearance allows homeowners to temporarily pause making monthly payments and avoid making late fees on their loans. It’s a timely question to consider, as roughly 3 million borrowers are currently behind on their mortgage, and 2 million are presently 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, albeit at possible impact to one’s credit history 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 credit rating.
For example: Jean, an otherwise upwardly mobile 30-year-old female and first-time homeowner, 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 to obtain 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 history, it can help her avoid potential foreclosure, which could be even more damaging to her credit score.
Mortgage Forbearance Requirements
Facing an ongoing financial hardship? Make a point to call your lender 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
Under the terms of the CARES Act (a government plan to help provide individuals economically impacted by COVID-19 with financial relief), help was provided for millions of home borrowers. As part of the CARES Act, borrowers who were facing economic hardship due to the pandemic could request and may have received mortgage forbearance for a term of up to 1 year, provided that they met certain eligibility requirements. In addition, for the duration of this forbearance period, property foreclosures were prevented from occuring.
However, do take note: For many borrowers, the 1-year end date on mortgage forbearance is impending and extensions on federal programs are also set to expire. Be sure to check your specific dates. On the bright side, should you find that you’re having trouble making monthly mortgage payments, many lenders (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 lender.
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Pros Of Mortgage Forbearance
There are many advantages to obtaining mortgage forbearance, including being able to settle on a mutually approved plan with your financial lender to help you steer your monthly budget back into the black without breaking the bank.
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. 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. Applying for mortgage forbearance offers a means through which to remain comfortably housed in your residence until such time as your finances rebound – and can prove a hugely important tool in your efforts to maintain ongoing fiscal stability.
Create Lender Goodwill
Mortgage forebearance provides an option to actively work with your lender 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.
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 forebearance 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 lenders, 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 and credit rating 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:
The Bottom Line: Talk To Your Lender
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. Given that it may also impact your credit score and ability to recoup equity from the sale of your home, you’ll want to do some research before deciding to make the commitment. Remember: There are many avenues through which to receive mortgage help – be sure to consider them before you settle on a preferred solution in your time of financial hardship.
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