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Financing

Can't Pay Your Home Loan? How Mortgage Forbearance Can Help

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It happens to the best of us: You lose your job, then get slammed with medical bills, or a nor'easter dumps a foot of rain that floods your basement. Your savings flow down the drain along with the rainwater. And to add to the stress, you may not be able to pay your mortgage, which could ultimately force you to forfeit your home.

Don't panic. Rather than miss a payment, in a financial pinch you can ask your mortgage lender to suspend or lower payments for a while. This is known as mortgage forbearance, and it can give you some breathing room for a few months to get your financial life in order. But even though lenders might give you a break, will you live to regret it? Here's what you need to know.

What it is

Forbearance isn't a free pass; nor is it a one-size-fits-all solution. It's an individual agreement between lender and borrower to provide some short-term relief. The forbearance period is something you negotiate with the lender -- it can last from a month to a year, although the average is three to four months. The idea is to cut borrowers some slack until they can resume paying the original mortgage as usual.

"Our primary goal is to help delinquent borrowers avoid foreclosure and stay in their homes," says Brad German, a spokesman for the Federal Home Loan Mortgage Corp. (Freddie Mac), which purchases home loans from lenders.

When to act

Immediately! The first and most important step in seeking forbearance is to contact your lender the minute you know you won't be able to make a payment. The worst thing you can do is to stop paying, hide your head in the sand, and pray the lender won't notice. Not only will the lender notice, it'll report late payments to credit bureaus, and be less likely to extend forbearance if you ask for it.

"As long as you're the one calling and telling them there's a problem, the lender will most likely work with you," says Kevin Lynch, assistant professor of insurance at the American College for Financial Services in Bryn Mawr, PA. "If you just quit paying your bills, and they have to call you, it's cast in an entirely different light. And that light will not be favorable."

What to say

Tell the truth -- Family medical crisis? Job layoff? -- and provide as much detail and proof that your lender requires. From there, the lender may agree to extend forbearance, but perhaps not off the bat before you discuss other options first.

Most lenders prefer to offer a loan modification that permanently reduces your monthly payments, often for a lower interest rate, but stretches your loan over a longer period of time. Or, if you've fallen behind on your mortgage but can now resume regular payments, a lender may agree to a repayment plan where a portion of the overdue mortgage amount is added to your regular payments until you catch up. Freddie Mac reports that in 2015, its participating members structured 6,000 mortgage forbearances, compared with 21,000 repayment plans and 54,000 loan modifications. The type of mortgage help you get depends on the duration of your hardship and what your particular lender is willing to offer.

If the lender offers forbearance, you both will agree to the length of the forbearance period, the amount of a reduced payment, and the eventual terms of repayment. Though tempting, don't ask for more forbearance time than you need, but also don't agree to less time than you think it will take to get back on your feet.

What happens once your time is up?

After the forbearance or the extension has ended, you'll have to repay the amount that was suspended or reduced -- principal, interest, taxes, insurance. Typically, no extra interest is charged on the payments you missed. You can make a one-time payment for the amount due, or add on payments to your regular mortgage until you're up to date. If the hardship continues, some lenders will extend the forbearance for a few more months, or else you can "cure" the past due amount by modifying your loan. Most often, the loans are modified, says German.

What does forbearance do to your credit?

Nothing, according to FICO -- the software company that creates algorithms that credit bureaus use to determine how creditworthy you are.

"Generally, forbearance is not likely to have any impact on the credit score," says Ethan Dornhelm, a FICO senior director of model development. Lenders may (or may not) report to credit companies the existence of a mortgage forbearance, but it definitely does not wreck your credit like being delinquent on a mortgage. All told, it could be just the timeout you need to get back on your feet.

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Watch: What Your Mortgage Broker Wishes You Knew