Mortgage Forbearance: Understanding Your Options in Times of Crisis
Simply put, mortgage forbearance is a temporary pause in mortgage payments. It is an agreement between the homeowner and the mortgage lender that allows the homeowner to temporarily stop making mortgage payments or reduce their payments for a specified period of time. This period is usually between three to six months, although it can be extended depending on the agreement reached.
During this period of forbearance, the payments that are due are not forgiven; they are just deferred. This means that homeowners will have to repay those missed payments at a later date, either through a lump-sum payment or by adding on additional payments to their regular mortgage payments. It’s important to note that interest will continue to accrue during the forbearance period, which means homeowners will end up paying more in the long run.
Eligibility for Mortgage Forbearance
Not everyone is eligible for mortgage forbearance. To qualify, homeowners must have experienced a financial hardship that has made it difficult for them to make their mortgage payments. This could be due to a job loss, reduced income, or unexpected medical expenses. It’s important to note that homeowners who are already behind on their mortgage payments may not be eligible for forbearance.
Additionally, the mortgage must be owned by a federally backed lender, which includes loans insured by the Federal Housing Administration (FHA), loans guaranteed by the Department of Veterans Affairs (VA), loans backed by Fannie Mae or Freddie Mac, and loans made by the U.S. Department of Agriculture (USDA). Homeowners with non-federally backed mortgages can still request forbearance from their lenders, but it’s at the discretion of the lender to approve or deny the request.
Types of Mortgage Forbearance
There are two types of mortgage forbearance available to homeowners during this crisis: payment forbearance and payment reduction. Payment forbearance is when the mortgage payments are paused completely for a set period of time. Payment reduction, on the other hand, involves reducing the monthly mortgage payments for a specified period of time. Both options are valid for up to 12 months, and homeowners can choose the one that best suits their financial situation. It’s important to note that homeowners can also request an extension of forbearance if they are still facing financial difficulties at the end of the agreed-upon forbearance period.
The Impact of Forbearance on Credit Score
One of the most common concerns homeowners have about mortgage forbearance is its impact on their credit score. It’s important to understand that during the COVID-19 crisis, lenders are required to report any forbearance agreement to credit bureaus as current. This means that your credit score will not be negatively affected by requesting a forbearance. However, if you were already late on your mortgage payments before the forbearance, those late payments will still be reported and may impact your credit score.
Is Mortgage Forbearance the Right Option for You?
Mortgage forbearance may seem like an attractive option for homeowners struggling to make their mortgage payments during this crisis. However, it’s important to carefully consider all the factors before requesting a forbearance. As mentioned earlier, mortgage forbearance does not forgive missed payments, and homeowners will still be responsible for paying them back in the future. Additionally, interest will continue to accrue, which means the total amount owed on the mortgage will increase. Homeowners should also keep in mind that forbearance is a temporary solution, and they will eventually have to resume making full mortgage payments once the forbearance period ends.
Conclusion
In these uncertain times, many homeowners are facing financial difficulties and struggling to make their mortgage payments. If you find yourself in this situation, mortgage forbearance may be a viable option for you. Just make sure to carefully consider all the factors and explore all your options before making a decision. And remember, forbearance is not a long-term solution; it’s a temporary relief that must be repaid in the future. If you have any doubts or questions, it’s always best to consult your lender or a financial advisor for guidance.
