Nearly 88 percent of home buyers will use a mortgage in order to finance their purchases. Of these individuals, just under 90 percent of them will opt for a 30-year mortgage term.
The next common mortgage term is 15 years, but this is only used by about six percent of home buyers. These are far from the only choices as your mortgage term could also be for 10, 20, 25, 40, or even 50 years.
Regardless of your mortgage term length, there are going to be plenty of financial ups and downs over the years. You could get a promotion at your job or be laid off. You might receive a large inheritance or rack up expensive medical bills. It’s possible that a worldwide pandemic hits like COVID-19 did back in 2020.
The point is the future is unpredictable, and you might find yourself falling behind on your mortgage payments. Fortunately, there are plenty of options that can help to get you back on track with your mortgage. One of the most popular options is to request a mortgage forbearance.
A mortgage forbearance is an agreement between a homeowner and their mortgage lender. During a specified period of time, the lender won’t require any monthly payments to be made.
In addition, they won’t report these missed payments to credit bureaus or attempt to foreclose on the home. However, most mortgage forbearance agreements do come with an interest penalty that will be tacked on to each missed payment.
The exact details of a mortgage forbearance can vary significantly. Some agreements might last for a few months, but others might last for longer than a year. Eventually, the forbearance period will end. Then, the total principal, interest, taxes, and insurance will be due as a lump sum.
Using a mortgage forbearance can be very helpful for anyone that’s falling behind on their monthly payments due to a temporary financial hardship.
A forbearance is not an effective solution for long-term financial problems. For example, you might want to seek forbearance if you’ve recently undergone an expensive medical procedure, had some unexpected car trouble, or got divorced from your spouse.
Situations like a natural disaster or losing your job might be easier to get through with a forbearance, but you will probably need to seek other mortgage relief options.
Mortgage forbearances were extremely common during the coronavirus pandemic. As many as 7.6 million borrowers used a forbearance at some point during the pandemic or another.
The United States government established a few programs to help prevent homeowners from being evicted. For example, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. The CARES Act made it easier for homeowners to be granted a forbearance and likely kept millions of Americans from being evicted.
Under normal circumstances, it can be a little difficult to be granted a forbearance from your mortgage servicer. Seeing as how the current times are far from normal, mortgage lenders are much more understanding, and it’s easier to get a forbearance.
These are the general steps that you will need to follow to receive a mortgage forbearance:
Contact your mortgage lender and set up an appointment to talk about a potential forbearance. (Their number should be on your monthly mortgage statement.)
If the forbearance is approved, then you’ll receive a formal document that outlines the specific terms and conditions of your forbearance. Sign and return this document to officially enter into a forbearance.
If the forbearance is declined, you can try to appeal the decision by providing more information or making changes to your request before repeating the process.
Eventually, the mortgage forbearance will end, and you will be forced to repay what you owe. The total sum will depend on how long the forbearance lasted and the number of your monthly payments.
According to the United States Census Bureau, the median mortgage payment was $1,556 in 2018. If you have a mortgage payment that’s roughly the national average and a forbearance of six months, then you would have a debt of $9,336.
Remember that you’re probably going to be charged additional interest and other fees during your forbearance. So that means that you would end up paying much more than this sum.
Not having to make a monthly mortgage payment can certainly help you to save up some money over time. However, a $10,000 debt isn’t something that most people can pay off without some help.
That’s why a forbearance period is really just the first part of an agreement. The second part is the repayment period.
There are a few options available during this time:
The easiest way to end a forbearance is to pay off the total due in one lump-sum payment. Obviously, this option is also going to be the most difficult as well. Paying off your forbearance balance would officially reinstate your mortgage and restore it to a “current” status.
If you were able to save up enough money during the forbearance and can afford to pay the entire amount, then you should do so without pause. You can put your stress to bed and prevent any more financial penalties from being tacked on.
Remember that you’ll need to restart your monthly mortgage payment schedule. Make sure that you’ll be able to afford next month’s mortgage before you pay off the forbearance debt.
If you can’t afford to repay the total debt when the forbearance period ends, your first option should be to request a deferment. Having a deferment granted is one of the more difficult options on this list, but it’s probably the best one overall.
There are a lot of similarities between a forbearance and a deferment. Both terms will mean that you won’t be required to make a regularly scheduled payment. The key difference is what happens when that period has ended.
If a payment deferral is granted, it usually means that the total balance will be applied to the end of your mortgage term. In other words, if you have 20 years left on your mortgage and had a forbearance lasting six months, you would now have 20 years and six months remaining instead.
In some cases, the mortgage lender might require the entire amount to be paid off in one lump sum. Even if that’s the case, you would have the entire remaining time left on your mortgage to save up for it.
If you can’t get a deferment, establishing a payment plan is the second-best option for repaying a forbearance debt. All you would be doing is taking the total debt and dividing it by the length of the payment plan.
So if your mortgage lender gives you 24 months to repay a $9,336 debt, then your monthly payments would increase by $389. The longer that you are given to repay your debt, the less that your payments will increase.
You and your mortgage lender will both be eager to see the forbearance repaid, but you shouldn’t rush into an agreement that you can’t afford. A couple extra hundred dollars tacked on to your mortgage each month can be pretty hard to maintain.
The most important thing about setting up a payment plan is whether or not the cause of the forbearance has been resolved. If you were struggling to make your monthly payments before the forbearance, then it will only get harder if you haven’t fixed the problem.
Even if you stretch a payment plan for decades, your monthly mortgage payment will still be higher than it was before. You shouldn’t start a repayment plan until your finances are stable and you can afford it.
It’s not unusual for a homeowner to make a few modifications to their mortgage agreement over the years. A mortgage modification might be able to help you repay a large forbearance debt.
Essentially, a mortgage loan modification will function as a payment plan, except it will give you a little bit more freedom. By going down this path, you would have a few different choices available.
You could request that the forbearance that the balance is factored into the rest of your mortgage. Instead of having to pay several hundred dollars extra each month, you would probably only add on another $50 or so.
You could also take the opportunity to add a few years onto your mortgage that could lower your regular monthly payments altogether. Keep in mind that adding time to your mortgage will mean that you’ll be paying much more in interest. You might be able to save some money on your monthly payments, but you’ll be spending much more in the youlong run. A modification may only solve your housing problem, and not alleviate your full financial struggles.
Sometimes a few months of forbearance isn’t enough to get your finances back on track. It’s a dangerous move to rush back into regular mortgage payments if you aren’t financially stable.
Remember that you won’t just be resuming your normal mortgage payments: You’ll need to start paying off the forbearance debt too. Even if you are given an extension on the forbearance plan, you’ll only be delaying the inevitable. The forbearance debt will eventually come due.
Depending on what triggered your need for a forbearance, you might never be able to recover financially. Losing your job, needing an expensive medical operation, or the death of a loved one can permanently change your income.
You might not be able to afford the same luxuries in life that you did before these events. Instead of risking a foreclosure, it might be a good idea to sell your home as soon as you can.
You are free to sell your home at the end of the forbearance period, but there are a few things you’ll need to know. Before you can get another mortgage to purchase a new home, you’ll need to wait for at least three months.
During this time, you would also need to make three consecutive mortgage payments under your modified loan agreement or payment plan.
Forbearance is only an effective solution for temporary problems. For instance, a pipe bursting and flooding your basement would probably require a few thousand dollars to fix. A forbearance of a few months can help you to make the necessary repairs without falling behind on your mortgage.
However, if you are constantly struggling to meet your mortgage payments, then you might need to consider more long term repayment options:
A co-investment means that you are selling a share of your home equity to Balance.
Balance is a homeownership program for homeowners who want to access their home equity to meet their financial needs but have trouble qualifying for a loan or refinance due to their credit score. This helps Balance provide an option for families facing foreclosure or unmanageable debt to stay in their homes and improve their financial health. Balance will pay off your mortgage and other debts and provide additional cash out from your home equity.
Homeowners like Balance’s program because they qualify based on an understanding of your situation and not your credit score. And provide ongoing access to your home equity to stabilize your finances and avoid setbacks. Homeowners that use Balance are better positioned to stay in their homes, rebuild their credit, and improve their finances for a better future.
By maintaining your home equity and taking these proactive steps, Balance believes we can help you rebuild your credit and financial health — and create your path back to traditional homeownership.
Refinancing is a common strategy used to get better rates for a mortgage. You’ll essentially be taking out a new mortgage in order to pay off your current mortgage.
While that might sound like a lateral move, it can be helpful under the right circumstances. For example, if your credit score has greatly improved since you took out your mortgage, then you might be able to receive a lower interest rate.
You would also have the option of taking out a longer mortgage that would lower your monthly payments. The problem with refinancing is that it can take a few months to get an answer. Plus, you’ll need to shop around, and the hard inquiries into your credit can hurt your score.
If you’re already struggling to make payments on your mortgage, you should try to find a faster solution to your problems.
A mortgage forbearance can be a handy way to solve short-term financial problems. Not having to pay your mortgage for a few months might be able to help you get back on your feet. The problem is that the debt will eventually come due; you’ll have to repay the total missed payments with interest.
Instead of entering into a mortgage forbearance, it might be a better idea to look into a co-investment agreement. Get your free proposal from Balance Homes today and see if a partnership is the right option for you.
Sources:
When to Refinance Your Mortgage | Investopedia
Can I Sell My House While in Forbearance? | NerdWallet
Vulnerable US homeowners face uncertainty as mortgage forbearance ends | Reuters
The average monthly mortgage payment by state, city, and year | Business Insider
Mortgage Forbearance Agreement Definition | Investopedia
10 15 20 25 30 40 and 50 Year Mortgages: A Comparison | MortgageCalculator
