What You Need to Know About a Mortgage Forbearance

A mortgage forbearance is not a good thing. For many people facing this dilemma, it can be the first step before foreclosure begins. Probably the most important two things you want to do as you face this prospect are 1) educate yourself about your options and 2) think long term. A mortgage forbearance is NOT a long term solution to financial problems. At best, it will buy you some time. At worst, you will continue plowing money into a house that you will eventually lose. Whatever the end result, you’ll come out financially better off by being proactive about taking action.

What is a Mortgage Forbearance?

Mortgage forbearance is a temporary solution that you enter into with your mortgage lender at a time when you cannot make your full mortgage payment. The exact agreement varies substantially depending on your personal circumstances and the policy of the lender.  

A forbearance only allows you to work through a temporary financial difficulty. Typically, forbearance is only granted for up to 6 months but 12 months is possible. A longer period of time is not usually your friend because it puts you even further behind on your payments. For this reason, mortgage lenders favor shorter forbearance periods. Keep in mind there is no requirement to even grant a forbearance.

A forbearance can be either a suspension or reduction in your monthly payments during the agreed to period of time. At some point, after the forbearance period, you will have to make up the payments, plus interest, plus possible late fees. A big kicker here is that you might be required to begin making up the payments immediately following the forbearance period. If you are barely recovering financially, you may not be in a position to make extra payments. But you may have other options.

One option might be adding the deferred payments onto the end of your loan. In that case, your loan is extended but your monthly payment doesn’t change. Or you could be required to begin making additional payments immediately following the forbearance period. The size of the makeup payments must be negotiated before you agree to enter into a mortgage forbearance. The size of the additional payments varies greatly. It could be double payments each month until repaid, 1 1/2 payments each month, or something else.

In a worst-case, your payments could be suspended for 3 months but all of the back payments become due as soon as your payments resume. If your payments are $1,000 per month, your bill would be $4,000 plus interest all at one time. Of course, most forbearances agreements are not this brutal but it gives you a reason to fully understand what you are committing to and consider other options. More likely, your agreement will be somewhere in the middle between adding it on at the end and having it all due at once. You might have your payment reduced by $750 for 3 months and then have 12 months to make up the back payments plus interest and other costs.

The reasons a lender will grant a forbearance are based on provable financial difficulties that have a reasonable expectation of resolving in an acceptable amount of time. Examples include:

• Temporary unemployment
• Illness
• Temporary disability
• Natural disaster
• Other short term financial hardship

Forbearance is not the right solution if you don’t have reasonable prospects of regaining your financial health relatively soon. Go over your budget with a fine toothcomb. Know exactly what you can and cannot afford to do. Know when your income will resume and other bills that also be due at that time.

Other Options to Consider

Never assume a mortgage forbearance is your best or only option. Each of the options below should at least be given some thought and explored if these seem to be a more reasonable choice.

• Resume making on-time payments while making up back payments over a few short months if your income has already restarted.
• Delay payments to others that you owe (be aware of how your credit score will be affected).
• Home Affordable Modification Program (HAMP) – specific requirements apply.
• Other refinancing or mortgage modification options with the lender.
• Sell the house during the forbearance period.
• Short sale.
• Deed in lieu of foreclosure.
• Bankruptcy.

A mortgage forbearance can work simultaneously with one or more of these other options. Your lender might agree to suspend your payments while a modification is being worked out and add the missed payments onto the modified loan. Or they might suspend payments while you sell the house. All of this is a negotiation that you need to pay close attention to so you are not surprised by the result.

Your First Step in a Mortgage Forbearance

If you have missed one or more payments or will soon miss a payment, be proactive by contacting your mortgage company. Explain your circumstances and be prepared to provide documentation. Explain any steps that you have already taken to stay current with your payments (second job, borrowed money, cut back on expenses, etc.). There should be two parts to the discussion. You want to understand what the lender can offer as help and you want to be clear about what you can or cannot pay. This is the beginning of negotiating an agreement. Be open to other options.

Keep detailed notes about all discussions including the times and with whom you spoke. Ask for written documentation of all the information you need to make an informed decision. Organize all of your incoming and outgoing correspondence. Don’t procrastinate. Gather information, ask a lot of questions, weigh your options, consider professional assistance separate from your lender, and take action. Be sure you know any deadlines that you are facing. Missing a deadline can nullify the best option you have available.

Please comment with your knowledge about mortgage forbearance or other options.

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