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A Helpful Guide To Understanding Forbearance

A Helpful Guide to Understanding Forbearance

The coronavirus pandemic has certainly taken the world by storm. For many, jobs have been lost, housing has been displaced, and many have fallen ill. Among it all, businesses and people alike have come together to help those who are suffering the most. Even banks have joined in. While forbearance has always been an option without a global pandemic, more than ever, people are choosing to look into mortgage relief options.

One type of mortgage relief is called forbearance. According to Investopedia, forbearance is a temporary postponement of mortgage payments. It is a form of repayment relief granted by the lender or creditor in lieu of forcing a property into foreclosure. Loan owners and loan insurers may be willing to negotiate forbearance options because the losses generated by property foreclosure typically fall on them.

It’s important to note that this general definition of forbearance can be very misleading. Before we dive into what forbearance entails, let’s set two things straight:

  1. If you can pay your mortgage, pay your mortgage.
  2. If you can’t pay your mortgage, or can only pay a portion, contact your mortgage loan servicer immediately.

If you choose to forego your mortgage for the time being, the bank will let you do so up to only so many months. Let’s say you choose to forego it for 6 months. During these 6 months, you will not have to make a single mortgage payment. What you choose to do with any income during these months is completely up to you, however there is a hitch at the end of this 6 month duration.

 

  • Once the 6 months of no mortgage payments are up, you will owe your lender (the bank) the 7th month’s mortgage PLUS all 6 months before then.

Let’s break it down in numbers. Let’s say your mortgage is $2,400 a month.

$2,400 x 6 = $14,400. In theory, you will be able to save $14,400 over the span of 6 months. However, with forbearance, you will owe the $14,400 PLUS the 7 month’s mortgage of $2,400 all at once. That’s $16,800 out of your pocket. While this is typically standard for many banks, there may be other options you will be able to ask for or consider.

  • Option two allows you to extend your mortgage’s life span. If you currently have a 30 year mortgage that began in January 2000, your house would be paid off in January of 2030. With option two of forbearance payments, the bank would simply extend your mortgage until July of 2030. Not only does this save you $14,400 at the front end, but gives you peace of mind.
  • The last and not so common option is paying the 6 months off with repayments. Say your bank tells you, they’ll add ⅓ of your monthly mortgage to each month starting the 7th month after you started forbearance. This would then break up the 6 months of missed mortgage payments into a total of 18 months (it would take 3 months to pay off one missed month). Instead of paying $2,400 for the next 18 months, you would now be paying $3,200. 

Please note that each lender is different, they may offer only option one, or they may offer all of them. We are here to simply break down what forbearance is and the ways in which you can pay it off. Reach out to your loan servicer to see what options are available for you.

In short, 

  • Forbearance is when your mortgage servicer or lender allows you to pause (suspend), or reduce your mortgage payments for a limited period of time while you regain your financial footing.
  • Forbearance doesn’t mean your payments are forgiven or erased. You are still required to repay any missed or reduced payments in the future.
  • Forbearance could affect your options to refinance or purchase another home.
  • If and when your income is restored, reach out to your servicer and resume making payments as soon as you can so your future obligation is limited.

 

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