is one tool lenders and mortgage servicers can use to help homeowners ease their financial burden in order to avoid defaulting on their loan.
There are many reasons why homeowners would need forbearance, from unemployment to a change in marital status. Common circumstances in which forbearance might be necessary include:
- Homes damaged or destroyed in natural disasters
- Loss of income
- Medical issues
- The death or illness of a co-borrower
- Separation or divorce
- Job relocation
- Increased expenses
Mortgage Forbearance Options
There is no one type of forbearance plan. The length and terms of a mortgage forbearance differ by the type of loan you have, your servicer or lender and your circumstances. The two common types of forbearance plans include:
- Pausing payments. A pause in payments means that you can stop paying your monthly mortgage payments for a specified period. This period can be a few months or longer, depending on your circumstances. During this period interest will usually accrue on missed payments until they’re repaid.
- Reduced mortgage payments. A reduction in mortgage payments means that your lender cuts how much you owe each month by a certain percentage that’s affordable to you for a set amount of time. For example, if your monthly payments are $2,000, your lender might reduce it to $1,000 for six months.
As forbearance plans differ by individual lenders and loan types, the same applies to repaying your forbearance. There’s no one-size-fits-all option, so it’s important to talk to your lender about what’s possible for your situation. Common repayment options include:
- Lump-sum payment. Once the forbearance period ends, you would owe the total sum (principal and accrued interest) in one payment. If your monthly payments were $3,000 and you paused them for six months, you would owe $18,000 at the end of your forbearance. This could be challenging for people facing financial hardships. However, if you’re expecting a windfall at the end of your forbearance (perhaps through investment income or an employment bonus), a lump-sum payment might be doable.
- Extended terms. A second common repayment option is to extend the term of your loan. If you have 15 years left on your mortgage and you pause your payments for three months, you would add the extra months to the end of your term, so you would have 15 years and three months left to pay off your mortgage. In this scenario, you would simply resume normal monthly payments when the forbearance period ends.
- Payments spread over time. The third common option is to divide how much you owe by a certain amount of time and make monthly payments until it’s paid off. If you owe $18,000 in mortgage payments, you can break up that large amount by paying it over 12 months. In this scenario, you would pay an extra $1,500 per month for 12 months on top of your regular monthly mortgage payment.
If you think a mortgage forbearance is right for you, research your options. A housing counselor should help you understand what your rights are and the relief options available to you. The Consumer Financial Protection Bureau website can help you locate a housing counselor.
Contact your lender or servicer, as well. They can give you information about programs you might be eligible for, as well as their specific rules and qualifications.
There are also national, state and local programs designed to help homeowners in crisis, such as the Hardest Hit Fund, which was established after the 2007 housing crisis and operates in 18 states and the District of Columbia. In the case of a natural disaster, some lenders might require that you apply for a forbearance within a certain period of time.
Traditionally, lenders will conduct a thorough review of the borrower’s finances before they approve an application to make sure borrowers can resume making payments when the forbearance period ends.
Forbes.com