Mortgage forbearance is when your mortgage lender allows you to pause or reduce your mortgage payments for a limited time because of financial hardship.
Many homeowners experience unexpected challenges that negatively affect their finances, making it hard to make an on-time mortgage payment. On these occasions, mortgage forbearance can help the homeowner avoid foreclosure.
What is Mortgage Forbearance?
Mortgage forbearance is an agreement between you and your lender to pause or reduce your loan payment when you experience sudden financial hardships. Generally, the agreement can lower or entirely suspend the payments for a given period if your lender approves. It helps you avoid becoming delinquent with your mortgage payment while giving you time to rebuild your finances and avoid foreclosure.
Some reasons that may cause you to seek mortgage forbearance include the following:
- You lost your job.
- You got divorced.
- You experienced a natural disaster.
- You are unemployed for health reasons.
- Your work hours were reduced.
- Your property taxes and/or homeowners insurance increased.
Eligibility Criteria for Mortgage Forbearance
You might be able to obtain COVID-19 mortgage forbearance if you experienced financial challenges directly or indirectly due to the pandemic. Moreover, if you have federally backed loans like USDA, VA, HUD, Freddie Mac loans, or Fannie Mae, you have the entitlement to a COVID hardship forbearance.
Furthermore, mortgage lenders may offer similar forbearance options for mortgages that are not federally backed. Lenders are generally required to discuss payment relief options with you, so contact them as early as possible to discuss a mortgage forbearance.
Mortgage forbearance is not limited to first mortgages. It may also be available for a second mortgage or home equity loan.
Related: 9 Types of Home Loans
How Mortgage Forbearance Works
Contact your lender and request a mortgage forbearance. You may need proof of your financial hardship, such as recent pay stubs. Furthermore, your mortgage lender may want to know whether your hardship is short-term (six months or less) or long-term (more than six months).
If your request for mortgage forbearance is granted, your monthly payment will be lowered or suspended for a given period. Additionally, the servicer will agree not to start foreclosure within a specified period.
Furthermore, a CARES Act mortgage forbearance agreement may enable you to avoid foreclosure until your finances improve. Sometimes, your servicer or lender can prolong the forbearance period if your finances do not improve by the end of the initially agreed period.
Pros of Mortgage Forbearance
Below are some of the top benefits of mortgage forbearance:
- Gives you additional time to fix your finances: Financial constraints can sometimes be unpredictable and unpreventable, but you can overcome them with time. You can have a mortgage forbearance period of up to 180 days as you get back on your feet financially. Then, it may be extended an additional 180 days, for 360 days.
- Saves you from foreclosure: Your lender can foreclose on the property when you can’t meet your mortgage payment obligation. Fortunately, a mortgage forbearance can save you from foreclosure.
- Allows you to reside in your home: During the foreclosure process, you must leave your home. However, a mortgage forbearance agreement permits you to stay in your home as you work on boosting your financial state.
Cons of Mortgage Forbearance
Although mortgage forbearance has exceptional advantages, it has the following disadvantages:
- It’s temporary: Mortgage forbearance offers a temporary solution for homeowners struggling financially. At the end of the forbearance term, you must continue to make mortgage payments.
- You must repay the missed payments: At some point, you must repay the payments you missed during the mortgage forbearance. Your servicer or lender typically has options for repayment which may include:
- Paying a lump sum.
- Paying over time with your mortgage payment, thus increasing your monthly mortgage payment until the forbearance portion is repaid.
- Defer repayment of the mortgage forbearance till the last mortgage payment date (or earlier whenever the home is sold or the loan is refinanced or otherwise paid off).
- Modifying the home loan may include extending the term to lower the monthly payment.
How to Apply for Mortgage Forbearance
The application procedure varies depending on factors like your lender and the type of loan. However, for the general methods, the first thing to do is inform your lender about your situation and your hardships. Next:
- Request for forbearance, stating whether you need to make partial payments, the amount you’ll be paying, or you need total suspension. Also, you must state the number of months of forbearance you require.
- Then, submit the documents your lender requests and wait for a response.
- After your lender approves your request, you can proceed with the agreement.
- Ensure you regularly communicate with your mortgage lender to keep the lines of communication open and ensure a smooth process.
Financial constraints can significantly impact your mortgage payment method, resulting in default or property loss. Thankfully, mortgage forbearance protects you from losing your home and lowering your credit score. However, don’t stop making payments unless you’ve communicated and agreed with your lender; otherwise, you may become delinquent.
We specialize in conventional home mortgages, FHA, VA, and USDA mortgage options, refinance loans, and reverse mortgages. We’ve worked extensively with cash-out refinancing, and help clients to lower their monthly mortgage payments.