Mortgage forbearance and using home equity have both saved many households dealing with financial stress from foreclosure.
In mortgage forbearance, lenders pause payments. It is only a short-term solution since most payments only pause for up to a year. Another option for dealing with financial burdens is to use the equity in your home to obtain needed cash.
Mortgage forbearance has provided much-needed relief for millions of homeowners financially impacted by COVID-19. But what happens when you need access to home equity while you’re still in forbearance? Can you get a home equity loan or line of credit if you’ve paused or reduced your mortgage payments?
As a homeowner currently in mortgage forbearance you may be wondering if you can leverage your home equity to get some extra cash during this difficult time. The short answer is yes you can get approved for home equity financing even if you’re not currently making full mortgage payments.
However, there are some important factors to consider when applying for a home equity loan or line of credit (HELOC) while in forbearance In this article, we’ll cover everything you need to know, including
- What is mortgage forbearance?
- Home equity loan vs HELOC
- Qualifying for home equity financing
- Using home equity to exit forbearance
- Alternatives to tap home equity
- The bottom line
What is Mortgage Forbearance?
Let’s start with a quick refresher on mortgage forbearance. Forbearance is an agreement between you and your mortgage lender to temporarily pause or reduce your monthly mortgage payments for a set period of time.
The CARES Act allowed homeowners financially impacted by COVID-19 to enter into forbearance, even without proof of hardship. Most forbearance agreements last up to 12 months, but can be extended up to 18 months total.
During forbearance, you are still responsible for repaying the missed or reduced payments. You’ll work out a repayment plan with your lender when the forbearance period ends. This can include paying a lump sum, higher monthly payments, or extending the mortgage term.
Forbearance does not erase what you owe, but rather defers those payments to a later date. You are still accruing interest during the forbearance period.
Home Equity Loan vs HELOC
If you need cash while in forbearance, a home equity loan or HELOC are two options that allow you to leverage your home’s equity. Here’s an overview of how each product works:
Home Equity Loan
- Fixed amount loan with fixed interest rate
- Receive funds as a lump sum
- Repaid in fixed monthly payments over a set repayment term
- Require good credit score to qualify
HELOC
- Revolving line of credit with variable interest rate
- Access funds as needed up to approved limit
- Repaid over “draw period” (usually 10 years)
- Typically require better credit than home equity loan
A home equity loan provides one lump sum payment upfront, while a HELOC gives you revolving access to approved funds over time. The choice depends on your financial needs.
Qualifying for Home Equity Financing
Lenders will look at a few key factors when determining if you qualify for a home equity loan or HELOC during forbearance:
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Credit score – You’ll likely need a 620 credit score or higher. Lenders understand scores may be impacted by forbearance.
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Debt-to-income ratio – Lenders will review your income and debts. Forbearance payments may be excluded from DTI.
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Loan-to-value ratio – How much equity you have. Many lenders require at least 15-20% equity.
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Ability to repay – You’ll need to show you can handle the new monthly payments.
While being in forbearance doesn’t disqualify you, lenders want to see you’re financially stable enough to manage the additional debt obligation. Strong credit, income, and equity will help your chances.
Using Home Equity to Exit Forbearance
Some homeowners seek out home equity financing as a way to exit forbearance. When the forbearance period ends, you are responsible for repaying any missed mortgage payments.
A home equity loan or HELOC can provide funds to bring your mortgage current in a lump sum. This allows you to exit forbearance quickly and avoid higher monthly payments or an extended loan term.
If you want to use home equity for this purpose, be sure to take the amount you need to repay forbearance into account when applying. You’ll have to qualify for a large enough loan amount to cover the missed payments.
Alternatives to Tap Home Equity
Beyond a traditional home equity loan or HELOC, a couple emerging options can provide homeowners with cash despite being in forbearance:
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Home Equity Investment – This financing option provides a cash lump sum in exchange for a share of future home equity. There are no monthly payments or interest during the fixed investment term.
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Cash-Out Refinance – If you have significant equity, you may qualify to cash out a portion through a mortgage refinance. This replaces your existing loan with a new, larger mortgage.
These alternatives let you leverage equity without adding debt you need to qualify to repay each month. They can be a fit for some homeowners in forbearance seeking funds.
The Bottom Line
Being in mortgage forbearance doesn’t automatically disqualify you from tapping home equity through financing like a home equity loan or HELOC. However, you do need to meet eligibility requirements related to your credit, income, and equity.
If you’re interested in leveraging your home’s equity to get cash now or as a way to exit forbearance, be sure to explore all your options. Work with a reputable lender to find the best home equity solution for your unique situation.
More than one way to access the equity in your home
You can benefit from several types of home equity financing options. The most common home equity options are home equity loans, home equity lines of credit and cash-out refinancing. Below is an outline of these, along with an additional way to tap into your home’s equity.
Home equity loan (HEL)
A home equity loan acts as a second mortgage. You must repay it over a certain period. Home equity loans usually have higher interest rates than primary home loans because if the house undergoes foreclosure, any sale proceeds go to the primary lender first. This puts home equity lenders – the secondary lenders – at greater risk.
Home equity loans provide you with a large sum of money all at once, making them helpful for large expenses, such as college tuition or home renovation projects.
Beware of added fees with HELs. The following are standard fees lenders might include:
- Application or loan processing fee
- Lender or funding fee
- Origination or underwriting fee
- Appraisal fee
- Broker fee
- Document preparation and recording fee
Lenders may use terms like interest rate add-ons, points or origination fees to hide these extra costs, so watch for these and ask plenty of questions when talking with lenders.
If you do sign papers for a HEL, you will have three days after signing to change your mind. During this period, you can cancel the agreement for any reason without penalties.
Home equity line of credit (HELOC)
While home equity loans dole out a single large sum, a HELOC provides money much like a credit card – but draws the money from your home’s equity. You access cash in small amounts over time, and only pay back what you use, rather than a total loan amount.
You can visualize the difference between a home equity loan and a HELOC with this infographic:
When taking out a HELOC, you should ask these questions:
- Do minimum and maximum withdrawal amounts apply?
- Is there a “draw period” of time during which you can withdraw money? If so, how long is it, and can you renew your HELOC after that period?
- How do you access your account? Via credit card, check or both?
- What is the interest rate?
- How much of your home’s equity can you borrow against? (It’s typically 85%.)
- What are the upfront and continuing costs?
- What are the repayment terms?
With both HELs and HELOCs, the Federal Truth in Lending Act can help you spot dishonest lenders and let you know your rights. According to this act, lenders must provide the following information when you apply:
- Annual percentage rate (APR)
- Payment terms
- All charges associated with opening or using an account
- Any variable-rate features they offer
- A brochure explaining their home equity plans’ features
Cash-out refinancing
Cash-out refinancing allows you to refinance your home rather than take out another loan. The refinanced amount is higher than the original amount, allowing you to pocket the difference in cash. However, you may face higher closing costs with this type of financing than with a HEL or HELOC.
Home equity agreement (HEA)
With a HEA, you can obtain cash in exchange for a percentage of your home’s resale value. With this type of home equity financing, you don’t have to make payments, and no interest accrues.
Using a provider such as Unlock, you can receive up to 10% of your home’s value in exchange for a percentage of the value (typically 16%) when you sell. Alternatively, you can buy back your equity based on your home’s appraised value. This arrangement allows you to live in your home payment-free while enjoying the cash from your home’s equity.
Applying for mortgage forbearance
In applying for a mortgage forbearance, lenders will want the following information:
- An explanation of financial hardship (it’s best to substantiate your claim with documents)
- Current income
- Current expenses
- Your most recent mortgage statement
To protect your credit score from further damage, it’s best to apply for a forbearance before you miss your first payment – as soon as you know you could be in trouble with payments.
Unlock Your Home’s Equity – 3 Ways to Access Cash WITHOUT Selling!
What is home equity for homeowners in forbearance?
Availability of home equity is also important for homeowners who may be unable to continue making their mortgage payments. Positive equity gives them the option to sell their home rather than face a foreclosure or a short sale. The following analysis examines home equity for homeowners in forbearance.
Can you sell a house if you’re in mortgage forbearance?
If you are among the roughly 1 million homeowners the Mortgage Bankers Association says are in mortgage forbearance, you may have thought about selling your home. Although, yes, you can sell your house in forbearance, that doesn’t mean you have to, especially if you have equity in your home.
Can mortgage forbearance Save you from foreclosure?
Mortgage forbearance and using home equity have both saved many households dealing with financial stress from foreclosure. In mortgage forbearance, lenders pause payments. It is only a short-term solution since most payments only pause for up to a year.
How much equity do you have in a forbearance?
Even after accounting for missed mortgage payments, a typical homeowner in a forbearance is estimated to have about $88,000 in equity — which is generally more than enough to cover the costs of selling a home and still have some equity left over.Table 1 February 2021© 2021 CoreLogic,Inc., All rights reserved.