When you’ve fallen behind on mortgage payments due to sudden illness or unexpected unemployment issues, a forbearance may seem like the perfect solution. This option allows homeowners to skip their required monthly payment for up to a year, but it should be used with caution.
As a short-term lifeline, it can help you save your home from foreclosure, but it can also cause you credit headaches in the long term. This is why one should only consider forbearance as a last resort. Read on to learn more about why you should or shouldn’t request a forbearance on your mortgage payments.
Reasons Why You or Your Borrower May Consider Mortgage Forbearance
The purpose of a mortgage forbearance is to allow borrowers to modify their loan repayment terms temporarily. Typically, lenders may allow homeowners to make payments that are reduced or don’t include interest. There are occasions where an entire year’s worth of owed payments could be suspended, too.
The benefit of the arrangements provided by a forbearance is for both the lender and the borrower. Why? Foreclosures are expensive and rarely recoup the entire amount the bank initially invested in the home it loaded money to purchase. If the only step needed to get a borrower back on track is to provide mortgage relief for a few months or a year, then it’s a worthwhile investment for the long term.
The Downside of Mortgage Forbearance
It’s important to remember that a mortgage forbearance arrangement has to be repaid when its period ends. So any money not paid to your lender during the months you were allowed to skip or pay a reduced payment will come due once the term is over.
Most lenders accept repayment in several ways, including:
- Lump-sum repayments
- Loan modifications
- Payment plans
Each of these also come with their own set of potential issues for the homebuyer. Below is a quick overview of each:
Issues with Lump-Sum Repayments
It can be almost impossible for those planning to pay for months of skipped monthly payments to set them up to be foreclosed upon. For example, let’s say you usually have a house payment of $1,100 a month, including any interest due. If you are allowed a twelve-month forbearance term, when it’s over, you would need to make a lump-sum payment of 13,200. Short of taking out an additional loan to cover that cost, this situation would leave you hard-pressed to have that amount of money available.
Even though a current federal program prohibits lenders from demanding lump-sum payments on forbearance plans due to COVID-19, this is ending soon.
Why a Payment Plan Could Leave You Further in the Red
Borrowers who opt to repay their forbearance obligations through a higher monthly payment could also end up underwater and in foreclosure. Unless you’ve bettered your financial situation since initially taking out the loan, these payments may not be affordable.
You Can’t Always Count on a Loan Modification
Some borrowers intend to get a loan modification and refinance their entire mortgage once the forbearance period ends. This could result in a lower monthly payment, reduced interest, or both. But, many homeowners won’t be able to find a bank to do this for at least a year after using forbearance measures.
Lenders want to know that whoever they provide a loan to has the ability and credit to repay their debt. This isn’t true of all banks, though. For example, loans financed through Freddie Mac or Fannie Mae might be able to apply for refinancing sooner, but there is still no guarantee of approval.
Mortgage Forbearance Can Ding Your Credit
Since the onset of the pandemic, mortgage forbearance requests have skyrocketed as homeowners struggle to keep their homes during a volatile employment economy. This shouldn’t hurt your credit because skipped payments of this type aren’t to be reported as late or missing. Unfortunately, lenders have still been known to mistakenly do so, causing a negative mark on your credit score.
Contact an Experienced Ft. Lauderdale Foreclosure Defense Attorney About Your Notice of Default
When you can’t afford the payments on your South Florida home, a mortgage forbearance may be your only real option to avoid foreclosure. Trust Attorney Marc Brown to provide you with over a decade of experience in foreclosure advice and defense. His years representing South Florida lenders make him the wisest choice when seeking aggressive legal representation to protect your home. To schedule a no-cost legal consultation regarding foreclosures and deficiency judgments, get in touch with the law offices of Marc Brown now.