If you, like so many Americans today, find yourself unable to make your house payments and are seeking mortgage relief, you should know that the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act gives individuals with federally owned or federally backed mortgages a right to forbearance.
But what is forbearance and how can it help you in this time of emergency?
What Forbearance Is
Forbearance is a pause or reduction on your mortgage payments put in place by your mortgage servicer or lender. An agreement like this is only granted to individuals with demonstrable financial difficulty. If your mortgage has already become delinquent, you don’t have to fret just yet: forbearance can help you to avoid foreclosure. Delinquent borrowers can request mortgage assistance and avoid additional fees and penalties associated with loan delinquency for the duration of the forbearance term.
What Forbearance Isn’t
Forbearance is not debt or loan forgiveness in any way, shape, or form—it is simply a temporary suspension of charges. Your interest rate and the outstanding balance will not decrease. Forbearance can help you make ends meet in the here and now, but it won’t provide you with long-term relief. Hopefully, your difficult financial situation resolves before your forbearance period is up, but there is always the possibility that this won’t be the case. You may be able to extend your forbearance period, but you can’t count on this. These agreements are not always flexible.
Typically, the likelihood of being awarded forbearance on a mortgage is dependent on your payment history, credit score, income, etc. Right now, however, many people automatically qualify for relief. Consider this example to get an idea of what this forbearance process might look like:
You are making monthly payments of $917 on your home, which cost $165,000, and for which you put $33,000 down. Because you are currently out of work, your income has been stripped and you already know you won’t be able to afford next month’s mortgage payment because you need to pay for food and necessities first. You contact your mortgage lender and are awarded a forbearance period, within which your payments will be fully paused, of 12 months. Four months after receiving this relief, you are able to make payments again and your missed payments are added to the end of your mortgage (extending your mortgage by four months).
The Dangers of Forbearance
There are some dangers associated with forbearance that you’ll want to be aware of. Though ultimately beneficial in many ways, forbearance isn’t a perfect solution. For one, it’s temporary—not permanent—relief. Don’t let this aid give you a false sense of hope. Forbearance can prevent your home from being foreclosed on, which is definitely a long-term benefit, but the payments will still need to be made at some point.
Another drawback is increased interest. The longer the term of your mortgage is stretched, the more interest you’ll have to pay overall. Your rate won’t go up before or after forbearance, but it’ll keep stacking onto itself. Forbearance pauses your payments, but it doesn’t pause accruing interest. For this reason, if you can avoid forbearance, do so.