Homeowners who find themselves in a financial hardship can seek what's known as mortgage forbearance. Provided by many lenders, this process allows homeowners to lower or pause their loan payments for an agreed-upon period of time. While it can give struggling homeowners some financial breathing room, they will still need to come up with a plan to pay back the principal and accrued interest later.
Key Takeaways
- Mortgage forbearance offers homeowners immediate financial relief but has some long-term consequences.
- Cons of mortgage forbearance include added fees and accrued interest.
- Homeowners can consider alternatives like refinancing, loan modification, or selling the home if forbearance is not the best fit.
- Mortgage forbearance can lead to further financial strain if you're unable to make the necessary payments once the forbearance period ends.
Understanding Mortgage Forbearance
Mortgage forbearance is a way for borrowers who have a financial hardship to keep their home loan from going into default. This process entails working with your lender to pause your monthly mortgage payments or make smaller ones. You still owe the full amount of your mortgage, plus any additional interest that accrues in the meantime.
Borrowers should contact their lenders to inform them of their financial situation as soon as possible if they're facing hardships that make it difficult to pay on time. Your mortgage lender will let you know what hardship or forbearance options are available, and what you need to do to proceed.
Types of Forbearance Plans
Your mortgage forbearance options will depend on what the lender is willing to offer. They could include:
- Pausing payments. The lender may allow you to stop making mortgage payments for a predetermined length of time and to pay the money back once the period is over—sometimes referred to as deferment. Interest typically accrues during this pause. Depending on the arrangement, you may either pay back a lump sum (the total monthly principal and interest due during the pause) or have your repayment term extended to longer than the original term.
- Reducing monthly payments. You may be able to negotiate for a lower monthly payment for a specified amount of time. Then, you'll make up for it by increasing your monthly payment after the forbearance period is done. Interest will still also accrue with this option.
Pros of Mortgage Forbearance
- Immediate financial relief. Mortgage forbearance can offer some relief for homeowners who are currently facing financial hardships.
- Avoiding foreclosure. If the homeowner abides by the agreement, the lender will not initiate foreclosure proceedings, which could cause them to lose their home.
- Flexible repayment options. You may have different options for what happens after the forbearance period ends. You might be able to extend your remaining loan term, make a lump sum payment to catch up, or increase the amount of your monthly payments while keeping the original loan term.
Cons of Mortgage Forbearance
- Impact on credit score. In most cases, mortgage forbearance won't affect your credit score in a significant way. However, if your lender reports your loan being in forbearance to the credit bureaus—Equifax, Experian, and TransUnion—it could have some impact. How much will depend on factors like your previous credit history.
- Accrued interest and fees. Most loans will continue to accrue interest plus any fees you may owe during the forbearance period. Once the period is over, you're responsible for paying this amount.
- Potential for future financial strain. Forbearance can take some pressure off now, but homeowners whose financial situation doesn't improve by the time the forbearance period ends could find themselves even deeper in debt.
Alternatives to Mortgage Forbearance
If you don't qualify for mortgage forbearance or decide it's not the right option for you, you have a few alternatives:
- Loan modification. In a loan modification, the lender changes your loan contract, such extending your repayment term, reducing your interest rate, or lowering the overall amount you owe. It's different from a mortgage forbearance in that the changes are permanent.
- Refinancing. Homeowners can refinance by taking out a new loan to replace their current one. The benefits include the potential for a lower interest rate and lower payments by extending the repayment period. Though there are usually fees associated with refinancing, the savings (if you qualify for a much lower interest rate) could be worth it.However, if you are in a dire financial situation, obtaining refinancing will be more difficult.
- Selling the home. Though it may not be the ideal solution, selling your home may be a preferable option, especially if you're already at risk of defaulting on the loan and losing it.
How to Decide if Mortgage Forbearance Is Right for You
Mortgage forbearance can help you get your finances back on track, but it isn't right for everyone. For one thing, it is up to the lender whether you even qualify. Some lenders may require you to provide documentation to prove you're facing a genuine hardship.
You'll also want to consider whether it's worth letting interest accrue for a period of time and paying it back later. Ask yourself if you will realistically be able to handle increased monthly payments or come up with a lump sum payment after the forbearance period ends, if those are the options the lender makes available to you.
Take the time to speak with your lender so you understand all of the options that are available to you as well as their pros and cons. Working with a housing counselor or a knowledgeable financial advisor can also help you decide whether forbearance is in your best interest. You can search for housing counselors through the U.S. Department of Housing and Urban Development (HUD) website.
How Does Mortgage Forbearance Affect Future Loan Applications?
In most cases, your chances of loan approval won't be affected if you enrolled in mortgage forbearance. However, the terms that a lender offers you could be. For example, you might not qualify for the most competitive interest rates or lengthier repayment terms.
Can Mortgage Forbearance Be Extended or Renegotiated if Financial Hardship Continues?
You may be able to extend or renegotiate your mortgage forbearance with your lender. Contact them to see what your options are, and whether you need to provide any additional documentation showing continued financial hardship.
How Does One Transition Out of Mortgage Forbearance Effectively?
Contact your lender to see what you need to do once the forbearance period ends. Some lenders may contact you 30 days beforehand to lay out your options. For example, you may be able to make a lump sum payment to cover the monthly payments you missed, and carry on like you did previously. Or you might have the option to reinstate your loan but extend its term, giving you more time to pay it back.
The Bottom Line
Mortgage forbearance offers financially strapped homeowners a chance to get some relief by either pausing or reducing their loan payments temporarily. However, interest still accrues on the debt and borrowers are still responsible for the full amount they owe. If you're considering forbearance, be sure to weigh all your options before making a decision.
