September 15, 2020

What Is Mortgage Forbearance and How Does It Work?

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To say we live in uncertain times is an understatement. If you need evidence, look no further than the entirety of 2020 so far. And for many of us, that uncertainty extends to our own sense of financial security.

Life can change at the drop of a hat. Maybe it’s a sudden medical emergency. Or the loss of your job. Whatever your situation is, you may find yourself one of an estimated 4.6 million American homeowners who have been forced to default on their mortgage payments as of June, 2020.

To give you a rough idea of just how much of the residential housing industry 4.6 million is, it’s over eight percent of all active mortgages in the U.S. And pandemic or no pandemic, banks are rarely sympathetic to lapses in mortgage payments.

Or are they?

You may have heard the term mortgage forbearance over the past few months. You may have wondered what precisely forbearance means. How it works. And whether or not you’re eligible for it. The good news is you very well could be eligible for mortgage forbearance—under certain conditions.

What Is Mortgage Forbearance?

Forbearance occurs when a lender allows a homeowner to temporarily freeze or reduce mortgage payments for a period of time (typically anywhere from 90 days up to twelve months) due to financial hardship. While it wasn’t unheard of prior to 2020, it wasn’t necessarily common. A mortgage is a legally binding agreement homeowners have with a bank; and failure to live up to the terms of that agreement could put them at risk of outright foreclosure if they missed three or more months of payment.

That changed on March 25th with the unanimous passing of the Coronavirus Aid, Relief, and Economic Security (CARES) Act by the U.S. Senate in response to the COVID-19 pandemic. Among other provisions, the CARES Act included an automatic suspension of mortgage payments for up to six months for eligible homeowners. Yet despite its intent, there’s no shortage of criticism facing the bill—chiefly, that it fails to provide adequate shelter for millions of Americans whose lives have been affected by the coronavirus. But for homeowners, it can mean an immediate sense of relief in an industry which historically hasn’t been particularly understanding of individuals facing economic hardship.

How Does Mortgage Forbearance Work?

Forbearance doesn’t eliminate you from making mortgage payments. What forbearance does is temporarily relieve you from payment for an allotted time. Under the CARES Act, you’re still subject to the initial terms of your contract. That means while you may have to pay additional interest or penalties on late payments, your lender can’t charge you extra fees on top of those terms. 

Equally subject to lender discretion is your payment schedule for mortgage forbearance. Some services may require an entire lump sum to be paid in full, while others can work with you to schedule payments according to your needs. Most lenders will understandably be a little more flexible in payment policies as a result of the pandemic. That doesn’t mean ignoring regular payments, however. Even after the forbearance period, federal law states that foreclosure can begin after 120 days without payment.

Will Mortgage Forbearance Affect My Credit?

Under the CARES Act, any account information your lender provides to a credit bureau as a result of forbearance will not have any effect on your credit rating. But it won’t alleviate your existing score, either. 

Who Is Eligible for Mortgage Forbearance?

Traditionally, forbearance is granted on a case by case basis. It requires working with a lender after 36 days of a delinquent payment to try and establish a modified payment schedule. Frequently, this would require renegotiating the terms of your mortgage, wither through a debt settlement program or refinancing your loan. Both of which required proof of financial hardship, and both of which could potentially affect your credit score.

Under the CARES Act however, there’s no additional documentation required to apply for mortgage forbearance. Simply by discussing with them how you’ve been impacted by the coronavirus, they can work with you to discuss available options best suited for your circumstances.

Additionally, you can still file an extension for up to 180 days even if you’re already in a forbearance program under the CARES Act. Speak with your lender to discover which option works best for you.

But to reemphasize, forbearance will not erase your mortgage. You’ll still have to pay back what you owe as well as interest and penalties (where applicable.) What forbearance does is give you just a little bit extra time.

And frequently? Time is just what a homeowner needs.

For any questions or to schedule an appointment with us, Enlight Homebuyers, give us a call at 317-333-7011 or fill out the form below.

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