The Truth About Forbearance and How It Can Affect You
There’s a common assumption that forbearance provides relief to homeowners, and it might be true, but only for a while. When you’re experiencing financial hardship due to job loss, a major illness, divorce, or the COVID-19 pandemic, forbearance can be one of your options to reduce your financial responsibilities.
However, you need to know the truth about forbearance and how it can affect you and your household’s stability. Let’s explore how forbearance affects you.
Forbearance is an agreement between you and your mortgage lender that allows you to temporarily reduce or pause your monthly loan payments. Typically, people request forbearance to prevent foreclosure, since they know they’re going to experience a short-term or temporary hardship.
Moreover, the mortgage lender will decide the best course of action depending on your situation and evidence of your financial crisis. Keep in mind that payment deferment is not an option on mortgage loans, so you’ll be requested to pay the missing period.
How to Request Forbearance
You must be aware that not all borrowers qualify for mortgage forbearance. You can apply to other options to avoid foreclosure, such as loan modification, refinancing the loan, debt settlement, and so on. But all of these options have negative consequences for your credit.
Remember, if you miss a monthly payment, your lender has the obligation to report it, affecting your credit score. Therefore, if you think you won’t be able to take over your financial responsibilities, you must contact your lender immediately and let them know about your situation. At that moment, have your basic loan information at hand and then, explain your situation and request forbearance. This could be over the phone.
After this first interaction, probably they’ll gather more info and once they have it all, they’ll contact you and let you know their answer. If you qualify, they’ll set up an appointment to sign the agreement terms:
- Forbearance Period
- Reduced Payment Amount (or suspended)
- Terms of Repayment
The loan still accrues interest, even if the payment is suspended, and you’ll continue receiving monthly statements.
How It Works
Once your forbearance agreement is settled, you’ll enjoy a grace period that typically lasts up to 90 days, but depending on your situation and lender’s flexibility, it may be granted for up to 180 days or even a year.
The main benefit is that during forbearance, your mortgage service company cannot initiate foreclosure, therefore, you won’t lose your home. In return, you’re legally compromised to resume monthly payments once the period is over, including the principal, interest, taxes, and insurance. Most likely your repayments options will be:
- Pay the amount in a lump sum.
- Add an extra amount to your monthly payment, until the debt is repaid.
- Do a loan modification.
Remember, you won’t necessarily have access to all of these options, since the agreement terms depend almost entirely on your mortgage lender and you’ll need to adapt to it. In some cases, your company will understand your circumstances and help you out, but sometimes they don’t, and, commonly, the lender asks for the skipped amount in a lump sum.
If you aren’t experiencing financial hardship anymore this might work for you but normally 90 days is not enough time to get back on your feet. So, you must prepare and consider forbearance options carefully before accepting any agreement.
How It Affects You
Skipping or making partial payments is considered delinquency and this type of behavior is recorded on your credit report. Also, it’ll harm your credit score because you violated the terms of your mortgage agreement.
When you’re in a forbearance period, your lender might report it to the national credit bureaus. They’re not obligated to but they can. For this reason, we advise you to ask your service company about their policy before accepting the agreement.
On the other hand, there are exceptions like the COVID-19 pandemic we’re currently living in and with the Coronavirus Aid, Relief and Economic Security (CARES) Act, homeowners don’t have to worry about negative credit reports. However, you must prove that your financial hardship is due to the pandemic.
Another Option With KC Property Connection
Forbearance is not a waiver or grant and once the agreement’s period is over, you have to take care of the missed payments. If you think that your financial hardship is a long-term situation and the common 90-days grace period is not enough to get back on your feet, contact KC Property Connections to sell your house fast. We buy houses in Kansas City and we’ll find a suitable solution for you.