Does Forbearance Affect Getting A New Mortgage

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Although entering mortgage forbearance may seem intimidating to homeowners experiencing unforeseen hardship, it is actually intended to be a lifeline in those precise circumstances. Knowing the fundamentals of this type of mortgage relief could help ease some of the anxiety. Here, we’ll cover essential forbearance questions.

What is mortgage forbearance?

In order to deal with a short-term crisis, such as a job loss, illness, or other financial setback, mortgage forbearance enables borrowers to postpone or reduce their mortgage payments. This can assist struggling borrowers prevent falling behind on their payments and prevent foreclosure.

Before you stop making payments, it’s imperative to speak with your lender or servicer, regardless of the reason you require forbearance. Learn the type of loan you have and the forbearance terms from your lender or servicer. Making payments no longer before you’ve been granted forbearance formally could result in you falling behind on your mortgage and have a detrimental effect on your credit history.

How COVID-19 affected mortgage forbearance

Numerous borrowers now have more options for mortgage forbearance thanks to COVID-19 and its economic effects. The federal government’s initial pandemic relief plan, known as the CARES Act, included assistance for homeowners with government-backed mortgages, such as those for VA, USDA, and FHA loans as well as Fannie Mae and Freddie Mac mortgages. These protections have since expired.

Mortgage forbearance vs. loan modification

For those who are having financial difficulties, mortgage forbearance is a temporary solution. In contrast, a loan modification permanently modifies the terms of the original mortgage. A modification does not excuse you from making payments; rather, it aids in reducing them to a level that is more manageable, whether through a reduction in the amount owed overall, a reduction in the interest rate, an extension of the repayment period, or a combination of these. To get a modification approved, you might need to show proof of hardship.

You have a few choices if your mortgage forbearance period is about to expire:

If you can afford it, you could repay the missed payments in a lump sum. This will bring your mortgage back to current status.

You could enter into a repayment plan, which adds an agreed-upon amount to your regular monthly payments so you repay the forbearance amount over a longer time period.

If you’re still dealing with pandemic hardship, you could ask for a forbearance extension, provided you qualify.

You could seek a loan modification, which changes the terms of your mortgage so you can better afford the payments.

If you can no longer afford to stay in the home and are willing to move, you could sell it to pay off the mortgage. If the proceeds aren’t enough, you might be able to complete a short sale in coordination with your lender, which can help you avoid some of the more negative impacts of a foreclosure.

Pros and cons of mortgage forbearance

Defers or lowers monthly payments temporarily

Can help prevent foreclosure, or pause proceedings

Can still sell the home or refinance

Potential for flexible repayment options

Must repay missed payments, either in lump sum or with repayment plan

Payments might increase after forbearance period ends

Might not be an option for rental properties or second homes, depending on loan type

The only way to know if you are eligible for mortgage forbearance is to get in contact with your lender or servicer. Be prepared to demonstrate proof of financial hardship and comply with all of your lender’s forbearance requirements.

Mortgage forbearance does not show up on your credit report as a negative activity; your lender or servicer will report you as current on your loan even though you’re no longer making payments. Again: You must be in touch with your lender about going into forbearance. Do not stop making payments until you’ve officially been extended that protection. Stopping payments before you’re in forbearance will seriously harm your credit.

Borrowers typically won’t have to pay additional interest on their mortgage in forbearance. The amount of interest and interest rate stays the same according to the borrower’s contract. The only situation in which the loan interest might change is if the lender extends the loan maturity date or increases the loan interest rate, says Andrew Demers, partner at Weiss Serota Helfman Cole & Bierman in Boca Raton, Florida, specializing in banking and real estate law. Demers points out it’s critical for borrowers to understand the payment terms of the forbearance and ask questions, including:

1. Is this a full payment deferral or do I have to pay interest or escrow advances during this time?
2. Is the loan maturity date being extended?
3. Will the lender recoup the deferred via a balloon payment at loan maturity, a postponed maturity date, or another catch-up strategy?

Initial forbearance plans generally last three to six months. You can typically request an extension if you require more time.

You cannot simply stop making payments because a mortgage forbearance is not automatic; otherwise, your credit score will suffer, and you risk defaulting on your mortgage or losing your home. Keep in touch with your mortgage lender or servicer to go over your options, whether you’re looking to forbear payments for the first time, need an extension, or are nearing the end of your deferred payment period.

FAQ

Can I buy a new house after forbearance?

Generally speaking, if you’ve finished your forbearance plan, you might be qualified to refinance or buy a home in the following three to six months.

Does forbearance affect you negatively?

Mortgage forbearance does not appear on your credit report as a negative activity; even though you are no longer making payments, your lender or servicer will still list you as current on your loan.

Does student loan forbearance affect getting a new mortgage?

If you’re trying to get approved for a home mortgage loan, student loan forbearance is not the best option. You must use 1% of the student loan balance when determining your debt to income ratio if your student loans are forbeared or deferred.

Can I get an FHA loan after forbearance?

A borrower who was given permission to defer mortgage payments “is eligible for a new FHA insured mortgage” when one of the following circumstances occurs, per the FHA official website: The borrower continued to make regularly scheduled payments, and the mortgage Forbearance Plan has been terminated.