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By Holly Welles
Special to the Financial Independence Hub
Millions of Americans have lost their jobs, experienced furlough and applied for unemployment during the COVID-19 pandemic. As a result, many are struggling financially, and some must even choose between buying food to feed their families and paying the bills. If you find yourself in the same predicament, you may wonder how you’ll be able to afford your mortgage payments in the coming months.
While rethinking your budget may help you scrounge up a few extra dollars here and there, it likely won’t be enough to pay your mortgage without a steady stream of money coming in. If you’re unable to make payments any longer, mortgage forbearance may be the route you need to take. Here’s what you need to know as you pursue this option.
Pros of Mortgage Forbearance
While mortgage forbearance shouldn’t be your first option when seeking financial assistance, it can be helpful, especially as you cope with short-term financial emergencies. Here are a few advantages of pursuing mortgage forbearance.
1.) Suspends mortgage Payments
If and when you agree to mortgage forbearance with your servicer, they will likely temporarily defer your payments for a specified period or allow you to skip some. This setup will help you avoid foreclosure or damaging your credit score.
Most importantly, a temporary suspension of payments gives you time to find a job, recover from the pandemic and begin saving money and eventually making payments again.
2.) Protection under the CARES Act
Under the CARES Act [in the United States], homeowners can receive certain protection benefits if they have a federally backed mortgage. One such benefit is that your lender or servicer may not foreclose on you until June 30. Another advantage includes having the right to request mortgage forbearance for up to 180 days, plus an additional 180-day extension.
Moreover, lenders don’t require documentation proving you qualify for forbearance. Speak with your servicer and answer a few questions about your financial hardship to qualify.
3.) Better Alternative to Foreclosure
The alternative option to forbearance is foreclosure: which often goes hand in hand with bankruptcy. This combination can easily sink your credit score for years and result in months, and even years, of legalities and paperwork. It’s also incredibly expensive for lenders to foreclose on a home, so allowing borrowers forbearance is a more affordable option.
Cons of Mortgage Forbearance
All of those benefits may make mortgage forbearance sound like a great deal. However, there are consequences to pursuing this option, even if it does solve your financial problems in the short-term.
1.) Possible Credit penalties
Pursuing forbearance during the coronavirus pandemic should not affect your credit score. In fact, the CARES Act states that no negative credit reporting or late charges will occur during your forbearance agreement. However, credit penalties and dips may still happen as your lender reports your account information to credit bureaus.
Of course, they should wipe the record clean once you’re making regular payments again, but mistakes do happen. Therefore, it’s smart to monitor your credit score both during and after forbearance.
2.) Payment Plan issues
Forbearance may allow you to skip payments now, but, ultimately, lenders want their money back. As a result, you’ll have to agree to a payment plan, some of which include making larger monthly payments once the forbearance period ends or even repaying the deferred amount at once. Of course, more expensive payments also require more money.
Homeowners who are concerned about affording a lump sum reinstatement should talk to their loan officer about alternative repayment options. Many households prefer to tack on missed payments to the end of their loan, effectively lengthening their mortgage but avoiding a short-term squeeze.
COVID-19 is an unprecedented crisis derailing the financial preparations of many households. Seek repayment terms that give you time to recover, rather than affecting your credit for years to come. Enlist the help of a credit counselor or other trusted professional if you need help navigating your options.
3.) Limited Refinancing Options
Refinancing could help those struggling under the pandemic to lower interest rates and monthly mortgage payments. However, those who use forbearance may not be able to refinance for another year after the forbearance period ends. This situation could keep people from purchasing a home or qualifying for loans in the future.
To address this pressing issue, government companies Fannie Mae and Freddie Mac are considering shortening the time to three months. For now, though, the restriction period remains 12 months.
What’s the best decision for your household?
While forbearance is better than foreclosure, you still shouldn’t make it your first option. Consider avoiding forbearance by taking advantage of alternatives the CARES Act may offer. For instance, you might use your $1,200 government check to help pay your mortgage or make a hardship withdrawal from your 4019(k) or IRA.
Whatever path you choose, consider all of your options, and think about the pros and cons before making a final decision.
Holly Welles is a real estate writer and the editor of The Estate Update. Her work on home buying, market trends and home improvement has been published by My Mortgage Insider, Homes.com and Porch.
