It can happen to anyone. One day you can’t make your mortgage payment. Maybe you lost your job or had a medical emergency. What do you do? You need to learn about mortgage forbearance.
What Does Forbearance Mean on a Mortgage?
When you can’t make your payment, you are in default on your mortgage and your lender can begin foreclosing on your property. However, the lender doesn’t have to do that. It can agree to hold off for a while. When your lender does this, you are in mortgage forbearance.
How Does Mortgage Forbearance Work?
Your lender will agree to accept lower payments, or even no payments, for a short period of time, along with a plan to catch you up.
For instance, your lender might allow you to skip a month or two and then make higher payments for the next year to catch up to what you would have paid the lender. Alternatively, if you can afford it, the lender might agree to let you make lower payments for a while, and higher payments after that until you are caught up.
Some lenders may allow you to skip a payment or two and extend your loan term. The unpaid principal and interest will be tacked on to the end of the mortgage, and you’ll make payments for an extra few months.
Mortgage Forbearance Requirements
Mortgage forbearance is meant to be a temporary solution. If circumstances have placed you in a bind so that you can’t make the mortgage payment, but given a break you can get back on your feet, most lenders will happily provide you with a forbearance.
If circumstances have placed you in a bind so that you can’t make the mortgage payment, but given a break you can get back on your feet, most lenders will happily provide you with a forbearance.
On the other hand, if you have had a change in your circumstances that is long term, a forbearance isn’t the answer, because it will be impossible for you to catch up. The death of a bread-winner in the family, a divorce and the collapse of a business are examples of changes in circumstances that are likely to affect you for a long time. In these instances, you’ll need a more permanent solution, such as selling your home.
If you do qualify, there’s more to know. Have you been reliably paying your mortgage until now? If not, your current situation isn’t temporary, because you’re likely to be in trouble again soon. This is one of the best reasons to stay current — when you really need the lender to be cooperative, it probably will be.
How to Request a Mortgage Forbearance
Mortgage forbearance does not automatically happen when you miss a payment, and your lender won’t call you to initiate the process. You must call the lender, and you should call before the payment is due. Make sure you are talking to someone who handles this. This may be the collections department, or in some banks the workout department.
Let the person know that you are going to have difficulty with the payment and ask if the lender has any programs that might be able to help you. The things that you should ask for include:
- Deferral of your payment for as long as you need to get back on your feet. (But be aware that if it’s more than two or three months, the answer will probably be “no.”)
- If higher payments would be hard for you to make even after your temporary situation is addressed, ask that your missed payments be deferred to the end of the term, rather than increasing your payment to catch up.
- Ask that your loan not be put into default, and that the missed payments not be reported to the credit bureaus.
Is Mortgage Forbearance a Good Idea?
The most important thing to know is that interest does not stop accruing while you are in deferral. This matters, because you will pay more interest in the long run. If you miss two payments of $1,000 and then get back on track, for example, you won’t owe $2,000 at the end of your term — you’ll owe a lot more.
Let’s take a look. Assume your interest rate is 5 percent, and you have 20 years left to pay your mortgage. At the end of your 20-year term, you would owe about $5,500, not the $2,000 in missed payments; you’ll have another 5 1/2 months added to your term.
If you don’t ask the lender to refrain from reporting to the bureaus and they don’t offer, you could end up with seriously bruised credit and be prohibited from borrowing at favorable interest rates again.
As you can see, you should use the mortgage forbearance tool sparingly, and it’s unlikely a lender would allow you to use it more than once. But it is a much better thing to do than to default on your mortgage.