Foreclosure is a frightening possibility for many American homeowners. Mortgage relief options, like mortgage forbearance, can help you avoid foreclosure. If you don’t know what mortgage forbearance is, how it works, or if it can help you keep your home, read on. We’ll explain all of these things and more.
Mortgage forbearance is a special allowance from a lender that pauses monthly payment obligations for a set amount of time. This plan can give you the opportunity to rebuild your finances and catch up on your payments, similar to a loan modification. However, a forbearance plan does not affect your loan’s interest rate, and it can have a negative impact on your credit score.
For example, say that you have a conventional loan, but you can’t make mortgage payments for the next few months because you unexpectedly lost your job. Rather than allowing your mortgage payments to pile up and risk the possibility of foreclosure, you can talk to your lender to request forbearance. If the lender agrees to forbearance based on the terms of your loan, they may allow you to pause your payments for up to 12 months.
During the forbearance period, you can look for another job and save up money. However, the catch with mortgage forbearance is that you have to pay your lender all the money you kick down the proverbial road.
Say that you enter a mortgage forbearance agreement with your lender, and your mortgage payments are halted for 12 months or some other period of time. At the end of the forbearance timeframe, all 12 months of those payments will be due to your lender, so you'll need to have saved up a significant amount of money before that time arrives.
Loan forbearance options are available through housing counselors and are often popular choices for home loans through Fannie Mae and Freddie Mac. Depending on your mortgage lender, they are sometimes also available for FHA home loans.
Mortgage forbearance is a possible loss mitigation strategy for any American homeowner. However, it's never a guarantee. You have to speak to your lender about mortgage forbearance and get them to accept the offer. If the lender says no, you'll need to find a different way to keep your home or avoid consequences to your personal finances.
Most mortgage forbearance terms are for anywhere between one month and 12 months. Furthermore, mortgage forbearance terms can vary in terms of whether you need to make a lump sum payment for all the money you owe your lender or you can pay them back over time with a repayment plan.
In both cases, a forbearance looks better on your credit report compared to a deed in lieu of foreclosure. If your current mortgage is in a forbearance period, the credit bureaus will take this into account when deciding whether you qualify for a refinancing arrangement or if you wish to purchase real estate sometime in the future.
In many cases, yes — a mortgage forbearance may allow you to keep your home because your lender essentially forgives delinquent payments for a certain amount of time. You can also potentially save your eligibility for future real estate purchases, particularly from federally backed mortgages.
Mortgage forbearance does not allow you to keep your home permanently without eventually making regular monthly mortgage payments. If you are unable to pay back what you owe your lender because of the forbearance, you can find yourself once again facing foreclosure.
Due to the way mortgage forbearance works, you need to have a good repayment and savings plan in place to take full advantage of this strategy. You should understand your financial situation and insulate yourself against job loss before bringing the option up to a loan servicer.
Mortgage forbearance has several major benefits, which makes it an attractive prospect for homeowners who need financial assistance.
At the same time, mortgage forbearance does have some potential disadvantages you need to be aware of, such as:
While mortgage forbearance can be an effective and helpful tool, it's not the only solution, let alone a good choice if you need long-term financial assistance. In that case, a home equity investment might be a wiser idea.
In a home equity investment, a co-owner, like Balance Homes, purchases a proportion of your home's equity and shares in its potential future appreciation. With Balance, our equity investment will replace your mortgage, so you don’t have any high-interest payments remaining.
In exchange, you'll make a monthly payment to us to cover your occupancy of the home and share of taxes and insurance. All the while, you can pay down your debt, save up money, or make necessary home improvements. Most importantly, you can stay in your home and retain the right to buy us out later on.
We’ll be co-owners with you — not take over the deed and lock you out of your property. Because of this, a home equity investment can be a fantastic way to keep your home and escape foreclosure for years to come.
Mortgage forbearance may help you avoid financial difficulties in the short term and keep your home while you stabilize your income. However, if you need a more long-term solution, you might consider working with Balance as a co-owner instead.
At Balance, we will invest in an equity share of your property and pay off any high-interest mortgage debt remaining under your name. With our help, you’ll have plenty of time to save up money and pay down other debt, then buy us out and reclaim total ownership of the equity in your property in the future. Contact us today to learn more.
Sources:
Learn about forbearance | Consumer Financial Protection Bureau
What is mortgage forbearance? | Consumer Financial Protection Bureau
Foreclosure Process | U.S. Department of Housing and Urban Development (HUD)
Home Equity: What It Is, How It Works, and How You Can Use It | Investopedia
