Is Mortgage Forbearance A Good Idea?
If you’ve been keeping up with our blog, we’ve been talking a lot lately about foreclosures and what you can do to mitigate consequences. We’ve been discussing this a lot lately and will continue to do so, because we’re nearing the halfway point of 2021 and the eviction moratoriums are about to be lifted. Lenders will start the foreclosure process and begin evicting homeowners, taking the homes back, and reselling them at auctions and on the market.
In almost all of our posts, one of my biggest recommendations has been to talk to your lender and negotiate how you can either delay or negotiate different terms with your lender, in order to avoid foreclosure. One solution that you could negotiate is mortgage forbearance.
But is mortgage forbearance a good idea? Let’s look at what it is and what it could mean for you if your considering this option.
What is Mortgage Forbearance?
Forbearance lets you skip some or all of your monthly mortgage payments for as much as a year. Sounds like a good idea right? Not necessarily.
Just because you skip payments, doesn’t mean they’re not due. Remember, banks and lenders are in the money business… and they want their money. They may negotiate things like:
- Spreading out missed payments over the remainder of your payments
- Put payments them on the back end of your schedule (often called deferment)
- Interest only payments or smaller payments
- They may delay it for a time & call all outstanding debt (that’s been skipped for a year) due at one time
If you have been missing payments for a year, can you afford to pay all your outstanding debts at one time? Many would say no.
In the near term, like we saw during the pandemic, forbearance can be a huge lifeline for homeowners, but it will definitely lead to credit issues for most homeowners in the long run. For this reason, forbearance should be a last resort.
Alternatives to Mortgage Forbearance?
If you have great credit, then forbearance may be your only choice. It could stall enough time for you to catch up, get on your feet and resume your payments.
For many borrowers though, foreclosure is the unfortunate alternative. Foreclosure destroys your record and leaves you in a massive hole to dig out of. This means you:
- Lose all the equity in your home, even if you’re on year 29 of a 30 year mortgage.
- Have foreclosure on your credit report for 7 years
- While you have that on your credit report, you may not qualify to buy another house, buy a car, get credit cards, rent cars and houses, and more.
- If you can’t qualify for buying things on credit, you would have a tough time repairing credit to get back in good standing.
For many that go into foreclosure, it may be 10-15 years before they can own a house again. For others, its so painful that they never own a home again.
That being said, foreclosure is neither good for the lender or the borrower. For the lender, it’s wildly expensive and time consuming, so mortgage forbearance is a good idea for both parties whenever possible.
Consequences of Mortgage Forbearance
During the past year, with the CARES Act in place, forbearance should not be counted against your credit… at least, that’s the theory. In a nutshell, lenders are the ones who are supposed to report your account information to the bureaus when you are “late” or “miss” a payment. And technically, you are not missing payments or late, you’ve mutually agreed with the lender to skip payments.
However, mistakes happen and they can still report the payments as late or missing. If this happens, and you’re doing this for a year, you could find yourself with seriously damaged credit by the end of it all.
What can you do to Avoid Mortgage Forbearance:
We’ve talked about these solutions in several of our articles, and we will restate them here. One of the big things we always say is first negotiate with your lender. Since the basis of this article is about negotiating with lenders, I’ll skip that one and offer the other alternatives.
- Use your government stimulus check – It may not cover a lot of payments, but at least it’s one or two of them. If you’re reading this in non-pandemic times, then this may not be relevant to you.
- Government Programs – There are several government programs that may be able to assist you. Ask your lender for a list of ones they recommend to help you make your payments. But remember, Uncle Sam wants his money too. This can be time consuming and costly in the long run.
- Ask for help from family, friends, churches, charities, etc. – People want to help you. Ask around your community and somebody may be willing to step in for help. Many times people in your community may lend money out to you and not ask for anything in return. Rare… but worth a shot.
- Draw Down Credit Lines – This can be risky, and I don’t recommend. But it’s still an option. If you see that you’re going to be back on your feet soon, maybe with new job or a waterfall of income for some reason, then drawing down some credit to make a payment may be a good idea.
- Sell Your House – It’s not something you may want to do. After all, this is your home. But remember the alternative is foreclosure, damaged credit, and near permanent rent status. At least you may be able to cash out, instead of give up, your equity to get you by for a little while.
So Is Mortgage Forbearance A Good Idea For Me?
If by the end of reading this article you’re still wonder “is mortgage forbearance a good idea for me?” Take some time to look over all your options in reality to decide what is best for you.
If you just want to be done with this and want to get out from under the debt that’s piling up, then the quickest way to do that might be to sell your house to a professional home buyer.
We buy houses as-is, for cash, or on terms, & will catch up your back payments. You don’t need to make any repairs or pay 10% of your home value out to agent’s commissions, fees, taxes, etc. You can get this weight off of you and move on to the next stage of your life.
If that sounds like something you want to explore, fill out a form below or call me directly at (910) 302-8659. We’ll discuss your situation and what kind of options are available to you.