Mortgage forbearance can pause your payments if you lose your job
Many U.S. homeowners are currently out of the job or working reduced hours because of COVID-19.
If you find yourself in this situation, and you’re worried about paying your mortgage, you’re not alone. And you have options.
Your first step should be looking into mortgage forbearance.
Regulators Fannie Mae and Freddie Mac, as well as individual lenders, are urging homeowners to take advantage of forbearance agreements that can suspend mortgage payments for up to 12 months.
Forbearance can free up your budget for daily necessities, and forestall mortgage payments until your paychecks start coming in again.
Here’s how it works.
In this article (Skip to…)
- What is mortgage forbearance?
- Forbearance doesn’t wipe away your debt
- How your repayment plan changes
- Who should use mortgage forbearance?
- Alternatives to forbearance
- Taking the first step
What is a forbearance on a mortgage?
A “mortgage forbearance agreement” is a deal you can make with your lender when you expect you’ll be late on payments or miss them altogether.
Forbearance means your mortgage lender agrees to temporarily do one of two things:
- Reduce your monthly mortgage payment, or
- Suspend your payments altogether for up to 12 months
The lender also promises not to foreclose on your mortgage or home. And you agree to get back on track with payments after the forbearance period has ended.
Forbearance periods usually span from a few weeks up to 12 months or longer, depending on what the lender agrees to.
Forbearance does not wipe away your debt
It’s very important to note that forbearance doesn’t eliminate your mortgage debt. It only postpones your payments — and you’ll still have to pay those back in full (plus interest) when that grace period is up.
“A forbearance agreement doesn’t erase or forgive any debt due to the lender. And it doesn’t stop the accrual of any interest,” explains attorney David Reischer.
“During the forbearance period, principal payments are merely postponed. Any unpaid interest that accrues will be added to the principal balance. That increases the total amount that you owe.”
“Any unpaid interest that accrues [during the forbearance period] will be added to the principal balance. That increases the total amount that you owe.” –David Reischer, Attorney
Joseph J. Zoppi is managing partner with Templar Real Estate Enterprises. He notes that after the forbearance period ends, you need to resume full payment. Plus, you’ll have to pay an additional amount to get current based on your missed or reduced payments.
“These payments will include all principal, interest, taxes, insurance, and other fees owed,” says Zoppi.
How forbearance affects your mortgage repayment plan
Once your forbearance period expires, there are a few options to start repaying your lender.
- Pay back the full sum at once
- Increase your monthly payment
- Restructure your mortgage
“You can pay a lump sum of what you owed during the forbearance period,” Zoppi explains.
“This can be done, for example, by taking out a short-term loan from a lender or family member, using a home equity line of credit, or liquidating investments.”
Or, you can pay extra on your monthly mortgage payments until your skipped amount is fully repaid.
“Alternatively, you can ask for a loan modification,” Reischer suggests.
“Here, the lender may agree to extend your loan term, reduce your interest rate, or convert an adjustable-rate to a fixed rate.”
Who should use mortgage forbearance?
Forbearance is a good option if you’ve lost a lot of money due to COVID-19 or are experiencing other hardships that prevent you from making full mortgage payments on time. But it’s not for everyone.
“It’s beneficial for those who expect to resolve their financial issues within a relatively short period. It’s not for those who have long-term challenges paying their mortgage or have had a loan modification,” Zoppi says.
Forbearance is “beneficial for those who expect to resolve their financial issues within a relatively short period.” –Joseph J. Zoppi, Managing Partner, Templar Real Estate Enterprises
Attorney and Realtor Bruce Ailion agrees.
“Say you’re placed on leave from your employer for three months. You can’t make your mortgage payments right now. But your job will be there when the COVID-19 crisis is over,” says Ailion.
“In this scenario, you’re a good candidate for forbearance.”
If you experienced a permanent layoff or income reduction, forbearance is likely not the best option.
Say, on the other hand, you lose your job or your small business fails. In this case, “forbearance may not be helpful because you may not be able to make payments once the forbearance period concludes.”
What else you can do if you can’t make your mortgage payment
If forbearance isn’t the right option for you, there are other ways you could potentially lower your mortgage payment or restructure your loan. Here are just a few examples:
- Refinance your mortgage. With interest rates remaining low, you might be able to reset your loan and possibly pay less per month or pay off your loan sooner. “Also, a cash-out refi may allow you to pay off other debts, thereby reducing your expenses and lowering your overall debt burden. This could make forbearance unnecessary,” says Reischer
- Rent out your home. Lease out an empty bedroom or living space for extra cash. Or move out completely and rent out the entire home if the rental income exceeds your mortgage payment
- Explore a principal reduction. Some government programs may allow you to restructure your mortgage loan by using a lower value for your home. “This can result in lower monthly payments,” adds Zoppi
- Refund your VA loan. Have a VA home loan that you’ve fallen behind on? “Under certain circumstances, you can have your house repurchased and serviced by the VA, which can provide more flexibility in making payments,” Zoppi says
There are other, more extreme options too. But these are a last resort, as they involve selling of forfeiting your home in order to pay off your debt.
- Consider a short sale. If you’re underwater on your mortgage, your lender may agree to accept less than what you owe if you sell your home and the proceeds come up short
- Explore a deed in lieu of foreclosure. Here, you surrender your home (technically the property’s deed) to your lender in exchange for being relieved of what you owe on the loan
There are likely ways you can restructure your mortgage to keep your home and stay current on your loan.
That’s especially true now, when lenders are willing to work with their customers and find solutions to COVID-19 issues.
Take the first step to mortgage relief
Feeling financial pressure? Contact your mortgage servicer as soon as possible and learn what eligible programs and possibilities are best for you.
“Don’t be afraid. Call your lender and explain your circumstances. Ask about a forbearance or any of these other options,” advises Reischer.
The rules are flexible right now, so there’s a good chance you’ll be able to work out a solution to relieve your current financial worries.Verify your new rate (Dec 2nd, 2020)