Cons Of Mortgage Forbearance

The forbearance path is only meant to be temporary. It allows you some breathing room while other options are being discussed, but the ultimate goal should be to get back on track with your payments as soon as possible. The sooner that happens, the better off everyone will be in the long run.

In this post, we discuss about the Cons Of Mortgage Forbearance, what is mortgage forbearance, does mortgage forbearance affect credit, is mortgage forbearance a good idea.

Cons Of Mortgage Forbearance

If you’re facing a difficult time with your home loan, you have options. The most popular option is to apply for forbearance. This is when your lender agrees to reduce the payments on your mortgage for a period of time. While this sounds like a great solution, it can cause problems down the road if it’s not handled properly. Here are three reasons why forbearance might not be right for you:

Delaying Bigger Problems

The forbearance path is only meant to be temporary. If you put off your problems long enough, they’ll just get bigger, and the longer you delay them, the more money you will pay in interest. Forbearance can help keep your financial life from falling apart in the short term, but it won’t solve anything long-term.

The best way to handle a foreclosure or other serious financial problem is to contact your lender as soon as possible. Your lender wants to help borrowers avoid foreclosure—or any other scenario that would hurt both parties’ bottom line—but lenders have their own rules about what they are willing (or able) to do for borrowers who fall behind on their payments.

Undermining Your Credit Score

  • The biggest downside is that postponing payments lowers your credit score. This can be harmful in the short term, and could also hurt your ability to take a home equity loan if you need one down the road.
  • If you take out a new mortgage later on and want to sell your house, then having missed mortgage payments will affect how much money you get from selling it.
  • Missing too many payments could result in having your home foreclosed on by the bank.

Lowering Your Buyback Ability

When you buyback your home, a portion of the remaining mortgage balance is forgiven. This means that if you sell your house before the end of your loan term, you can get more money from the sale than if you didn’t buyback at all.

You should consider buying back your home if:

  • You may need to move in a few years and don’t want to have negative equity (where an appraisal shows that the current value is less than what’s owed on your mortgage).
  • You plan on moving soon after retirement so that you can unlock equity early in retirement (and avoid paying taxes on any earnings) to boost income possibilities.

The forbearance path is only meant to be temporary.

While the forbearance path is meant to be temporary, it can help you get your finances in order and avoid foreclosure. Unlike a loan modification, which can sometimes take months or years before an approval is made, forbearance will usually allow for a much quicker transition into a different repayment plan. Forbearance can also provide some relief if you’re behind on payments due to extenuating circumstances such as medical bills or job loss because it temporarily stops payments from accruing interest on your mortgage balance. After two years of forbearing your mortgage payment(s), however, any remaining debt will come due along with all accrued interest charges since the last payment was made—which could make things much more difficult for you financially if not handled properly!

If you’re considering taking out this option but worried about what might happen afterward (or just want more information), contact one of our professionals today so they can help guide you through this process step by step while keeping both short-term goals and long-term investments in mind throughout the entire process!

what is mortgage forbearance

Forbearance is when your mortgage servicer or lender allows you to temporarily pay your mortgage at a lower payment or pause paying your mortgage. You will have to pay the payment reduction or the paused payments back later.

Forbearance can help you deal with a hardship, such as, if your home was damaged in a flood, you had an illness or injury that increased your healthcare costs, or you lost your job. Forbearance does not erase the amount you owe on your mortgage. You will have to repay any missed or reduced payments.

How to request a forbearance

Call your servicer and let them know your situation immediately. Ask them what “forbearance” or “hardship” options may be available.

Some servicers will require that you request forbearance or other assistance within a certain amount of time after a disaster or other qualifying event.

Mortgage forbearance options

Forbearance is complicated. There isn’t a “one size fits all” because the options depend on many factors. Those factors include:

There are key things to consider with each type of forbearance. You’ll want to pay close attention to how your servicer expects you to pay back any missed or reduced mortgage payments.

Here are some forbearance examples to guide you

Paused Payments Option-Paid During Existing Mortgage: Your servicer allows you to stop making payments for six months, but you must pay everything back at once when your payments are due again.

Mortgage Payment Reduction Option: Your servicer allows you to reduce your $1,000 monthly mortgage payment by half for three months. After the three months are over you have one year to pay back the amount of that reduction.

Paused Payment Option-Paid back at End of Mortgage: Your servicer allows you to pause payments for one year, and that amount is repaid by either adding it to the end of your mortgage loan or by you taking out a separate loan.

Where to seek help

For help in exploring your options, reach out to a housing counselor. Use the CFPB’s “Find a Counselor” tool to get a list of counseling agencies approved by the Department of Housing and Urban Development (HUD). You can also call the HOPE™ Hotline, open 24 hours a day, seven days a week, at (888) 995-HOPE (4673).

If you’re a homeowner in a state included in the federal Hardest Hit Fund , you may qualify for assistance.

does mortgage forbearance affect credit

Loan forbearance—a short-term reduction or suspension of payments in response to a borrower’s temporary hardship—can preserve household cash flow in times of economic difficulty. It can also have significant impacts on your credit history and credit scores.

Forbearance has long been an option for borrowers seeking relief from financial setbacks—and lenders historically have been fairly choosy about extending it. They typically grant forbearance only after a financial review to gauge the likelihood the borrower can resume regular payments at the end of the forbearance period.

As we’ll discuss below, a notable exception to this is issuers of student loans, who are legally required under some circumstances to offer payment forbearance, and even to allow deferment of loan payments, interest-free.

Today, amid upheaval and uncertainty due to the COVID-19 pandemic, vast numbers of individuals are candidates for forbearance and, with encouragement from federal and state agencies, many lenders, including issuers of mortgages, student loans and credit cards, are proactively offering forbearance arrangements to borrowers. In even better news for worried families, some creditors are even offering outright deferment on payments.

Forbearance vs. Deferment

Under a forbearance agreement, the lender agrees to accept reduced payments or no payments at all for up to 12 months. At the end of the forbearance period, the borrower must resume regular payments and repay the amount they were excused from paying during the forbearance period, with interest and possible fees. Repayment can be made as a lump sum, or in up to 12 installments, which are added to regular monthly payments.

In a loan deferment, payments are simply put on hold for a certain number of months; when the deferment period ends, loan payments resume as before, without accruing any additional interest or fees, and no repayment is required.

What Is a Mortgage Forbearance?

Mortgage forbearance is an option many mortgage lenders provide for borrowers facing temporary financial hardships. When the borrower’s circumstances threaten to lead to missed mortgage payments, it can help prevent foreclosure—a costly process for borrowers and lenders alike.

When a mortgage borrower seeks forbearance, the lender typically requires proof of financial hardship, evidence that the hardship is temporary, and assurances that the borrower will be able to resume payments and repay all missed payments, plus interest, at the end of the forbearance period. (Payment deferment is not typically an option with mortgage loans.)

Not all borrowers qualify for traditional mortgage forbearance. If you know you are going to miss mortgage payments, look into forbearance—but also consider other possible options for avoiding foreclosure, including selling the home or:

All of these options, except selling your home before you miss a mortgage payment, will be recorded in your credit reports and will likely have negative consequences for your credit scores—unless you are requesting forbearance due to the coronavirus crisis. As part of the Coronavirus Aid, Relief and Economic Security (CARES) Act, mortgage accounts in forbearance as a result of COVID-19 cannot be reported negatively to the credit bureaus by lenders.

Debt settlement and forfeiting your deed in lieu of foreclosure could have a serious impact on your credit, so these are only recommended as last resorts before foreclosure.

Can You Get Credit Card Forbearance?

Credit card issuers typically offer forbearance arrangements on a selective basis to borrowers facing temporary hardship. Credit card forbearance options may include:

Credit card issuers usually offer forbearance only on a case-by-case basis, and may not offer all relief measures to every customer who qualifies. The specific options they offer you may depend on how long you’ve been a cardholder, how disciplined you’ve been about making timely payments, and how high your outstanding balance is. They also do not offer it automatically: If you want forbearance on one or more of your credit card accounts, you need to contact your credit card issuers and request it.

Keep in mind that credit card forbearance does not halt the interest charges on your account and that, even if you qualify for a rate reduction, interest charges on a typical credit card account accumulate quickly. That’s especially true if you have a high balance, and truer still if you’re using an increased borrowing limit to add to that balance.

Also be aware that if you have a spotty payment history, or if you fail to resume payments after forbearance measures have been granted, your card issuer could lower your borrowing limit, freeze your account and even impose a repayment plan that calls for settling your balance in fixed monthly installments, after which the lender will close your account.

What Does Forbearance Mean for Student Loans?

Unlike mortgages lenders, which traditionally offer forbearance on a case-by-case basis, issuers of federally backed student loans have forbearance provisions built into their loan agreements.

There are two types of student loan forbearance:

Borrowers with federally subsidized student loans may also qualify for loan deferments on the basis of financial hardship, unemployment, military service or college enrollment. Deferment can be more difficult to get than forbearance, but the option is worth investigating, because it can mean considerable savings in interest compared with a forbearance agreement.

How Forbearance Impacts Your Credit

Without a forbearance or deferral agreement, skipping or making partial loan payments is considered delinquency. Delinquencies are recorded on your credit report and can have a major negative impact on your credit score.

How suspended or reduced payments are handled under forbearance agreements differs by loan type. Their consequences for mortgages and student loans have different potential impacts on your credit.

Mortgage Forbearance and Credit

With the exception of special circumstances during emergencies such as the COVID-19 crisis (more on that below), mortgage payments missed or underpaid as part of a deferral or forbearance arrangement are technically delinquencies, since they don’t conform to the repayment terms spelled out in your original loan agreement. Mortgage lenders have the right to report them as such to the credit bureaus, but they’re not required to do so. Ask your lender about their policy before accepting a forbearance agreement so you know what to expect.

Under mortgage forbearance agreements, lenders agree to refrain from pursuing foreclosure proceedings, which can do lasting damage to your credit over and above the harm caused by missed payments. A foreclosure stays on your credit report for seven years from the date of the first delinquency that led to foreclosure, so if forbearance allows you to avoid foreclosure, taking a near-term credit score hit might be a worthwhile trade-off.

Credit Card Forbearance and Credit

If your credit card lender grants your request for forbearance and you keep up with payments as agreed (resuming payments after skipping the number your lender agreed to and/or covering your reduced minimum payment each month, for instance), it’s possible, but unlikely you’ll see any negative entries on your credit report.

Credit card forbearance can hurt your credit score indirectly, however, by increasing the balance and utilization rate on your card.

If you fail to resume regular payments after your card issuer extends forbearance, the lender’s imposition of a repayment plan and eventual closing of your account will be noted in your credit report, and those events are likely to hurt your credit score.

is mortgage forbearance a good idea

Forbearance is a form of mortgage relief that can help you stay on track with your mortgage so you don’t default on your loan and risk your lender’s foreclosing on your home. When your loan is in forbearance, you can make reduced payments or no payments for a period of time.

Forbearance alone usually doesn’t hurt your credit, although it’s best to check your credit reports for possible mistakes. Whether forbearance is right for you depends on your circumstances. You may want to explore alternatives such as loan modification and refinancing to help make your mortgage payments more affordable.

How mortgage loan forbearance works

Mortgage forbearance gives homeowners a temporary break from their full mortgage payments while they recover from a personal hardship like losing a job or being in the hospital. The forbearance agreement might allow you to make lower payments than usual or to stop making payments for a set number of months.

There are different kinds of forbearance arrangements. The choices you have depend on whether your loan is backed by a private lender, by Fannie Mae or Freddie Mac, or by a government agency like the Federal Housing Administration or the Department of Veterans Affairs.

For example, people who have mortgages backed by Fannie Mae, Freddie Mac or a government agency — and who have been affected by COVID-19 — are eligible under the CARES Act for forbearance of up to 180 days, which may be extended at the end of the forbearance period.

The length of a forbearance period varies but may be in the range of three months to a year. During the forbearance period, you don’t have to pay interest. However, interest will continue to accumulate on the principal of the loan.

While forbearance allows a borrower to postpone making payments, it doesn’t lower the amount the person owes. Once the forbearance is over, the borrower has to make up the payments that were delayed.

Depending on the type of forbearance, you might have to make one large payment immediately after the forbearance period ends. Alternatively, you might be given a repayment period during which you need to make up the amount that was delayed, on top of the usual mortgage payments.

Finally, you also might have the option to extend the mortgage’s term or to take out a new loan for the delayed payments. If you extend the mortgage, then you make up the delayed payments after the loan would have ended. So, if the mortgage was in forbearance for six months, then after the conclusion of the original term, you’d make payments for an additional six months.

Taking out a new loan also may allow you to postpone paying back the missed amount until the end of the loan. With this option, you make up the delayed payments in a lump sum payment after the loan ends.

Is mortgage forbearance a good idea?

Whether mortgage forbearance can help depends on your personal situation. It may be a good option if you aren’t able to make your mortgage payments for a time but you expect the financial hardship to be over within several months.

For example, if you were laid off from your job but think you can probably find a new job with a comparable salary quickly, forbearance could give you relief from your mortgage payments while you look for employment.

On the other hand, if a crisis has permanently changed your financial circumstances for the worse, forbearance may not be a good option because you would need to resume your regular payments in the future.

Let’s say you need to care for a relative and have to cut your work hours in half, so that you have less income and can no longer afford your mortgage. If this situation is your new normal and you don’t expect your income to go back up soon, forbearance may not make sense since it would simply postpone your unaffordable payments for a limited time.

Does forbearance hurt credit?

When your mortgage is in forbearance, the payments you’re delaying shouldn’t be reported as late to the credit bureaus. But your lender might report that you’re in forbearance, which by itself usually doesn’t lower your credit scores.

Still, you should check your credit reports regularly to make sure no errors appear on it. If you see something inaccurate — like a reported missed payment after your forbearance started — you’ll want to contact the credit bureaus to get it corrected.

Pay close attention to your mortgage statements when your loan is in forbearance because you’ll need to start making payments again once the forbearance is over. If you lose track of your loan’s status and don’t make payments on time, your credit could suffer.

What are my options other than mortgage forbearance?

Forbearance isn’t the only option if you’re having trouble paying your mortgage. Here are some others to consider.

Loan modification

Unlike forbearance, which involves a short-term change to your payment terms, loan modification alters your mortgage for the rest of the life of the loan. If your mortgage servicer agrees to loan modification, it may allow you to pay a lower interest rate or to have more time to pay off your mortgage. And if the mortgage is for the house you live in most of the time, it might be possible to get part of your debt canceled so that you have a smaller principal amount to pay back.

A mortgage servicer will likely want to see that your difficulty making payments is due to a permanent hardship and that you have sincerely tried to meet your obligation before it will agree to change your mortgage terms.

Refinancing

You might be able to refinance your mortgage to get better payment terms. Refinancing means taking out a new loan and using it to pay off your current mortgage. If your credit scores are better now than when you took out your mortgage or if lower interest rates are available because of changing conditions in the economy, you might find a new loan with a better rate. That could give you lower monthly payments that are easier to manage.

Another way refinancing can reduce your monthly payments is if your new loan has a longer term, so that you make smaller payments over a longer period of time. Keep in mind, though, that a longer loan term means you’re paying interest for longer, too. Your lower monthly payments could come with a higher total interest price tag over the life of the loan.

Draw on savings

If you have money in an emergency fund, you may want to use it if you can’t pay your mortgage. You could also consider borrowing from your 401(k) if your plan allows you to do so.

If you are facing foreclosure, you may qualify for a hardship distribution to permanently withdraw money from your 401(k) if it’s permitted by your plan.

Sell your home

If you can sell your home for a price that covers the amount you still owe on your loan, then a sale may offer a path out of a mortgage you can no longer afford.

But what if selling your home will bring in less money than the amount you owe? Do you have to make up the difference? In most states, you have to negotiate with the lender for forgiveness of the difference — only a couple of states flat-out require forgiveness. Either way, this is known as a “short sale,” and it’s an action that typically can prevent you from taking out a new mortgage for at least two years.

While a short sale will probably hurt your credit, it may not have as dire an effect as a foreclosure. Still, you should generally only consider a short sale if you’ve exhausted other options.

Bankruptcy

Chapter 13 bankruptcy can allow people who have income to avoid foreclosure. The process usually results in a payment plan, which allows the borrower to repay their debts over the course of a few years.

But a Chapter 13 bankruptcy will stay on your credit report for seven years, likely reducing your credit scores significantly during that time. Lenders probably will be reluctant to lend to you with a bankruptcy on your record. And employers may find out about your bankruptcy when you apply for a job.

Because of these consequences, filing for bankruptcy usually doesn’t make sense unless you’ve ruled out all other alternatives.

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