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What is Mortgage Forbearance?
With the economy turned upside down as a result of the recent COVID-19 pandemic, a lot of people are struggling to make ends meet. For homeowners, your house is most likely your most expensive asset and also your biggest regular debt obligation.
If you’re struggling to pay your mortgage note, mortgage forbearance is an option that could be available to you. This agreement gives you a temporary pause in mortgage payments and can offer you the time you to get your finances back on track. Whether you can take advantage of it, though, will depend on the type of loan you have and who your lender is.
What is mortgage forbearance?
The first step to picking the best path forward for you, your family and your home is understanding what forbearance is. Mortgage forbearance is when the lender servicing your mortgage agrees to let you pause or reduce the size of your mortgage payments for an agreed-upon period of time.
The idea is to provide relief during tough financial times and give you and your family a chance to get caught up with a temporary break from your largest debt obligation.
The difference between forbearance, refinancing and loan modification
When it comes to changing how you repay your home loan, you have three main options — forbearance, refinancing or a loan modification. Each option comes with its own pros and cons and each works best for different types of situations.
As mentioned, forbearance is when your lender agrees to let you pause payment or lower the size of your mortgage payments for an agreed-upon period of time.
Refinancing is when you take out a brand new loan to pay off your old loan. Your old loan is finished (as it’s now paid off), and you’re only bound to the terms of the new loan. People generally refinance to take advantage of lower interest rates or loan term changes.
A loan modification happens when you make permanent, agreed-upon changes to your existing mortgage loan with your lender. This is not a new loan. You’ll have to work with your existing lender to see if they will agree to the more favorable terms you’re looking for. Generally, a loan modification is best when you’re struggling to keep up with payments and you expect the problem to be a longer-term issue.
Mortgage forbearance during COVID
You can expect to see some differences in how mortgage forbearance works during Covid. If you have a conventional loan that is not backed by the government, you may be given more leniency from your lender with forbearance options. It will depend on your specific lender, though.
If you have a federally-backed loan (VA, FHA, USDA, Fannie Mae, Freddie Mac), the CARES Act was passed to help. It offers some unique options for mortgage forbearance. If you contact your loan servicer and let them know you’re struggling financially as a result of the pandemic, you can get mortgage forbearance for up to 180 days. Additionally, you can contact the servicer and get another 180 days after that if you continue to have issues.
You do not need to submit documentation to prove your hardship. Your regular interest on your loan continues to accrue, but there are no additional fees, penalties or interest.
Refinancing after forbearance
Unfortunately, you’re unable to refinance your mortgage while it’s on a forbearance plan. That doesn’t mean you can’t refinance your loan after you get out of forbearance, hoowever. The Federal Housing Finance Agency announced in May of this year that loans backed by Fannie Mae or Freddie Mac can be refinanced once you’ve made three consecutive mortgage payments after you end the forbearance. In the past, the requirement was 12 months of on-time payments.
If you have another loan type, you’ll need to contact your servicer for details on what you can and can’t do. Your loan service company is the authority on this issue.
Tips for avoiding mortgage forbearance
If you find yourself not able to pay your mortgage, the good news is that you have options.
- Consider a loan modification. Your loan servicer doesn’t want you to default on your loan. They’re not in the business of selling houses, nor do they want to be. One option to consider is asking your mortgage service company for a loan modification. You may be able to lower the size of your monthly payments for the life of the loan and avoid forbearance completely.
- Talk with your loan servicer. There may be options available through your loan servicing company. The only way to be sure that you’ve exhausted all other options is to ask. No one is going to judge you, especially given the widespread damage COVID-19 has done to the economy.
- Understand sometimes it’s okay to ask for help. While it’s certainly not ideal, sometimes you need to ask for additional help. Mortgage forbearance is designed to help you weather the short-term struggle and get back on your feet. If you do need to ask for forbearance, it’s a much better option than defaulting on your loan and losing your house.
Things to keep in mind
- Don’t take it just because it’s there. It might be tempting to take the break from paying your mortgage just because it’s an option. The problem is that for government-backed loans, the interest still accrues. It’s not extra interest, but it’s still interest. With conventional loans, the forbearance may not be handled in the manner that you think.
- Ask the right questions if you have a conventional loan. Before you accept the forbearance, you need to ask how the paused payments are treated. Are you going to owe a lump sum at the end of the forbearance period? Are you able to extend the length of the loan and just add the missed payments to the end? Will monthly payments be higher at the end of the pause period to catch up? How is interest handled?