If you are facing financial difficulty, you may be considering mortgage forbearance. It could be an option that allows you to get some much-needed assistance until you get back on your feet.
However, there are mortgage forbearance pros and cons to be aware of as you navigate getting through this season of financial difficulty.
Let's go over exactly what mortgage forbearance is and how it works.
What is mortgage forbearance?
Mortgage forbearance is a way in which a borrower can get temporary payment relief from their lender if they are facing temporary financial hardship.
It is essentially an agreement between a mortgage lender and a delinquent borrower. In this agreement, the borrower's payments are suspended or reduced for a period of time to allow them to get current with their payments. During this time, the lender agrees not to foreclose on the mortgage.
You may be surprised at the number of those that are facing financial hardship. There are still 110,000 homeowners in mortgage forbearance according to the Mortgage Bankers Association.
As a result, millions of people with mortgages are seeking mortgage help. And so many lenders are also offering different variations of mortgage deferment programs to help ease the financial strain.
The terms of a mortgage forbearance agreement vary amongst lenders. It is also dependent on your financial situation. You may have to pay additional costs on top of your payments to get current with your mortgage over time. Keep in mind your mortgage payment includes your principal, interest, taxes, and insurance.
What you need to know about mortgage forbearance
While a forbearance program might give you temporary breathing room with your finances, you want to keep the following in mind:
You still owe your full balance
One key thing to know with forbearance is that you still owe the full balance on your mortgage. It does not reduce debt, neither is it debt forgiveness. This also means that at some point, your lender is going to expect payments, and also expect you to get current with your payments.
Some lenders may require a lump sum payment
With other debt deferment programs, you may have the option to go back to monthly payments after the deferment period is over. For example, deferring a car note. However, with mortgage forbearance, some lenders require a lump sum payment once the forbearance period is over.
For people facing financial difficulty, a lump sum is most likely out of the question. Especially in times of uncertainty like this one. However, there is a difference in mortgage forbearance vs deferment. Let's discuss what these terms mean and how they affect your repayment plan.
Mortgage forbearance vs deferment
So what is the difference between mortgage forbearance vs deferment? Again, mortgage forbearance is when you enter into an agreement with your lender to "pause" your payments so you do not enter into foreclosure. However, you will still owe the payments that were suspended. So, depending on the terms your lender may require a lump sum as discussed above.
With a deferment, the amount owed is added to the total balance to be paid when the mortgage is paid off. This means you will pay the amount owed when you pay off your mortgage, whether you stick with your loan full-term, refinance your current loan, or sell it.
So, now you know the difference between mortgage forbearance vs deferment, let's dive into mortgage forbearance pros and cons!
Pros and cons of mortgage forbearance
Sometimes financial strain can leave you with no choice but to request a mortgage forbearance. However, it's good to know the pros and cons of mortgage forbearance before you decide to do it or not.
Pros of mortgage forbearance
Although having to enter into a forbearance agreement isn't ideal there are pros to using it when needed. Here are a few pros to consider:
Helps you avoid foreclosure
One of the scariest financial situations you can face is having your home foreclosed on. A mortgage forbearance will help you avoid foreclosure and give you time to get back on track with your finances.
It's less damaging to your credit
Another pro is that although it affects your credit it is less damaging than a foreclosure. Plus, in special instances, such as with the COVID-19, it may not affect your credit because the terms are different with those programs. Either way, it's a much better option than having a foreclosure on your credit report for seven years!
Gives you time to catch up financially
If you are struggling to keep up with all of your bills, a mortgage forbearance can give you some time to get caught up. You could find ways to cut your budget and earn more money while having your payments on pause.
Cons of mortgage forbearance
There are some downsides to getting a mortgage forbearance. Here are some cons to keep in mind:
Your payments may be higher afterward
In some programs, the missed payments will be added to your normal payments until the amount is repaid. This results in an even higher payment than you had before and can make it hard to afford.
Will not help long-term if you are already house poor
Sure, a mortgage forbearance can give you temporary relief if you are struggling, but if you are already "house poor," it will not help you in the long run. Being house poor means that your monthly payment takes up to much of your income. So, you may want to consider downsizing into a smaller home if this is an ongoing problem.
Remember the best thing to do is compare mortgage forbearance pros and cons before you apply.
Going about mortgage forbearance the right way
Now that we've covered the pros and cons of mortgage forbearance you can decide if it's the right choice for you. If you think it's best for your situation you want to be sure you are taking the correct steps when applying. Here are key steps to take if you decide to proceed:
1. Communicate with your lender as soon as possible
If you are struggling to make your mortgage payments, communicate with your lender as soon as possible. Don't assume that they will automatically put you into a forbearance program. You need to have a forbearance agreement in place. So be sure you contact them as soon as possible to avoid further financial strain.
2. Ask your lender about payment options
Next, ask them specifically about payment options. If a lump sum is required at the end of the forbearance period, ask for alternatives. One alternative may be a loan modification. This is where the original terms of your mortgage are modified into a new agreement.
3. Determine the associated costs
Also, find out what interest or late fees are accruing during the forbearance period. This you are fully aware of what costs you would be obligated to. Once you know what they might be, you can start to factor these costs into your budget, along with your mortgage payment, when your forbearance program ends.
Compare mortgage forbearance pros and cons and get the support you need!
When it comes to mortgage forbearance, it's important to know all the facts before you make a decision. This way, you know what you are getting into. You'll also be able to create a plan to come up to speed with your payments when your financial circumstances improve.
If you are considering mortgage forbearance, you can also get unbiased help from counseling agencies approved by the U.S Department of Housing and Urban Development (HUD). They can go over default and foreclosure scenarios to assist you in making your decision. They will also provide you with details of your rights. The HUD website will also help you find an agency in your state.
Learn how to create a better budget and get back on track with your finances with our completely free budgeting course! Subscribe to the Clever Girl Finance YouTube channel and Clever Girls Know podcast for more tips on saving money and better budgeting!