What Is Mortgage Forbearance and What Are the Consequences?

Jun 20, 2022

5

min read

F

inancial hardships come like an uninvited guest; you never know how long they will stay. Thus, you must prepare and overcome them in possible ways. During these times, a mortgage forbearance is a form of blessing for borrowers. It helps reduce the overwhelming financial burden until your finances are back on track.

This article covers everything you need to know about mortgage forbearance.

What Is Mortgage Forbearance?

Mortgage forbearance is a temporary postponement of mortgage payments. It's intended for borrowers who are experiencing financial difficulties and are unable to pay their mortgage. Instead of forcing the borrower to foreclose or default, the lender temporarily provides forbearance to ease their financial burden for a while.

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There are several reasons the borrower would need forbearance, including personal and economic factors. Common circumstances include:

Loss of job
Divorce
Medical issues
Death of co-borrower
Pandemic
Lifestyle affected by a natural disaster

How To Apply For Mortgage Forbearance?

If you are facing financial hardship, you can apply for mortgage forbearance through the following steps:

Contact your lender for assistance and tell them about your financial hardship.
You may be required to fill out the application form and provide the supporting documents.
After your request is approved, your lender will provide you with the terms and conditions of forbearance.
When your forbearance period ends, your lender will contact you to discuss how you will proceed with the mortgage after. The lender may extend your forbearance period or provide several other options to ease your mortgage payment.

Is Accepting Mortgage Forbearance Good or Bad?

Mortgage forbearance may seem viable during a financial crisis as it lifts one of the financial burdens off the shoulder. But, it has both pros and cons. Thus, it's crucial to know about the pros and cons of mortgage forbearance to determine if it is a good or bad option:

Pros of Mortgage Forbearance

It Helps You To Avoid Foreclosure

The lender has the right to seize your house and possessions if you default on your mortgage debt. This is called foreclosure, and the impacts that it brings are significant. It negatively affects your credit score and credit history. Additionally, you might not be approved for loans in the future as it stains your credit history and decreases your credit worthiness. Thus, forbearance gives you a chance to evade a harsh foreclosure.

Stay In Your Home

Having a roof over you is very important when working towards getting back on your feet. During the foreclosure process, you have to move out of your home. All the challenges you overcame and the hours of effort you put in to build your dream house will be all in the past. Expulsion from one's own home is a painful experience. Thus, forbearance ensures that you stay in your home until your financial situation improves and you can earn back the home you rightfully own.

Extra Time To Get Your Finance Back On Track

You cannot prevent a financial crisis as they are unpredictable. There is no other choice than to tackle the situation head-on and work hard to get your finances back on track. It takes time, and mortgage forbearance provides you with that extra time you need. You don't have to pay your mortgage payments during the forbearance period, which somewhat lightens your financial burden for the time being.

Cons of Mortgage Forbearance

Temporary Solution

Mortgage forbearance is a temporary solution to overcome temporary financial hardships. But, if the difficulties persist long-term, it is not the right solution. You must file for bankruptcy and default on the loan at that time. If you cannot afford to pay the mortgage, foreclosure is the only option.

Balloon Payment

Since you are pushing back the mortgage payments, it starts accumulating, and you must pay back the whole sum at once. Mortgage forbearance is not alleviating your financial burden; it's just shifting them to the future. Thus, it's essential to have a proper plan on how you aim to pay your missed repayments. If you don't plan ahead, the lump sum payment might send you over the edge again.

Affects Your Credit Score

Mortgage forbearance can significantly affect your credit score. It doesn't hurt your credit score in the short term if your lender informs the credit bureau. The credit bureau will place your account on forbearance, ensuring that the missed payments do not affect your credit score. However, your credit score and profile will be negatively affected if you don't repay the borrowed money after the forbearance period has expired.

What Are Short-Term And Long-Term Consequences Of Forbearance?

While forbearance is a short-term solution to a financial problem, it has both short-term and long-term impacts on your financial profile.

Importantly, forbearance will only lift your financial burden short term. You don't have to pay the mortgage for a specific time. Your lender will report you to the credit bureau, and the bureau will keep your credit profile on hold. This means that even if you pay during the forbearance period, this will not benefit your credit scores.

After your forbearance period ends, you must pay your entire loan amount. This will add more financial burden as you need to pay back more to cover the missed payments. The worst will hit you if you cannot repay the loan after the forbearance period. Foreclosure and bankruptcy are pretty possible outcomes you'll have to deal with. If you default on your loan after the forbearance, it shows that you are not managing your finances well. This reduces your creditworthiness, and you might not be eligible for the new loan in the future.

Does Mortgage Forbearance Impact Your Credit Score?

Mortgage forbearance may or may not have an impact on your credit score. It depends on your lender and the type of forbearance program. It is known that late or fully unpaid payments significantly impact your credit score. Typically, mortgage forbearance deviates from the agreed-upon repayment plans and is considered late payments. But, the lenders report the credit bureaus about your forbearance such that the delayed payments won't impact your credit score. Your account will be kept under hold.

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But, mortgage forbearance indirectly impacts your credit score. Your credit usage ratio will be negatively affected since you'll be making lump-sum payments instead of regular payments for a period, thus negatively impacting your credit score. But, it's better than the damage that foreclosure or defaulting on the loan would have on your credit score.

In addition, if you can recover from a financial crisis and get back on track, your credit profile will reflect this. Showing that you can recover will boost your creditworthiness and rating. However, your credit rating will likely suffer if you fail to do so.

Is It Possible To Get A New Mortgage After A Forbearance?

Yes, you can get a mortgage after a forbearance, but there could be some restrictions. In the past, the homeowner had to wait one year after exiting a forbearance plan to take out a new mortgage. But, things have changed. You can now take out loans immediately or in a few months ranging from 3 to 6 months. It depends on your lender's terms and conditions.

Can You Refinance A Mortgage In Forbearance?

Yes, you can refinance a mortgage in forbearance if you have ended the program. However, if you are currently enrolled in the program, you must complete it first. In the past, the homeowners had to wait 12 months after their forbearance to refinance their mortgage. But now, you can refinance your mortgage after 3-6 months. But, conditions apply.

One exception is the cash-out refinance, for which you have to wait 12 months after the forbearance to apply for the refinancing.

Conclusion

Mortgage forbearance temporarily solves your financial hardships, easing your financial burden for a specific time. But, it's crucial to know that forbearance isn't forgiveness. Thus, you must pay back the loan and any accrued interest after the forbearance term has ended. It is the last chance given to you by the lender to pay off your mortgages before filing for a foreclosure or bankruptcy.

Forbearance helps you earn more time until your finances are back on track. However, forbearance can be pointless if you think your financial hardships are not short-term or you cannot find a way to overcome your difficulties.