All You Need to Know About Mortgage Forbearance

Key takeaways

• Mortgage forbearance allows you to pause payments and repay them at the end of the forbearance period.
• Mortgage forbearance can affect your credit, but not as severely as foreclosure.
• Accessing your home’s equity can provide money to ease financial burdens.
• Consider options for accessing your home’s equity for needed cash.
• Beware of scams and unethical lenders.

There are a wide variety of ways for homeowners who are behind on their mortgage payments to stave off foreclosure. In this article, we will examine two options: mortgage forbearance and and tapping home equity to access needed funds.  

In mortgage forbearance, lenders pause payments. It is only a short-term solution since most payments only pause for up to a year. Accessing the equity in your home is another method of obtaining cash.

Mortgage forbearance: what you need to know

In mortgage forbearance, lenders pause payments for distressed homeowners who cannot make payments. If granted, forbearance enables homeowners to avoid missed payments for the period – and the high fees and potential foreclosure that come with missed payments. Forbearance allows a borrower to re-establish financial footing. Interest still accrues during this period.

However, forbearance does not eliminate mortgage debt. You still owe the money. After the forbearance period, borrowers must repay missed payments. Depending on the individual forbearance agreement, it may be possible to repay this money in one of several ways:

• Making additional payments in addition to regular payments
• Repaying the total of the missed payments in one lump sum
• Repaying the total of the missed payments through selling or refinancing your home
• Deferring payments until the end of your mortgage
• Recalculating the total amount owed over the mortgage term for a new monthly payment amount that incorporates the missed payments

The forbearance agreement between borrower and lender should make the repayment terms clear before the forbearance period begins.

In addition to mortgages from private lenders, forbearance may be available for homeowners with federally backed loans, including those with mortgages from:

• HUD/FHA
• VA
• USDA
• Fannie Mae
• Freddie Mac

Mortgage forbearance versus loan modification

While mortgage forbearance pauses monthly payments, loan modification can lower monthly payment amounts through one of a few ways. Modification can provide a long-term solution for borrowers since it applies to the loan’s entire life.

Some ways lenders might modify the loan include:

• Extending the loan term length
• Reducing the interest rate
• Converting to a fixed interest rate from a variable rate

You can apply for a loan modification if you can prove financial hardship and have the means to make the modified payment amount. Often, lenders will require a trial period with the new payment before permanently signing off on the new payment schedule.

Mortgage forbearance and your credit

Mortgage lenders can report missed payments during forbearance, but some choose not to. If you are taking advantage of a forbearance offer, ask your lender whether they intend to report it to the credit reporting bureaus.

Whether the lender reports the missed payments or not, foreclosure poses a greater risk to your credit score than forbearance because it remains on credit reports for seven years. Forbearance only remains on your credit profile for a short period.

If you have been in an active forbearance in the past and want to borrow money again, most lenders will expect you to have repaid the forbearance amount, or at least have made 12 months of repayments on time.

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.

Home equity: what you need to know

If you are struggling to make your mortgage payments, forbearance isn’t the only solution. Accessing your home’s equity could also help.

Home equity is the current value of your home minus the amount you owe on it. To access your home’s equity means to receive money based on this difference. You will need to pay that money back according to the terms of the agreement.

Home equity solutions

Home equity financing generally has lower interest rates than personal loans or credit cards. For example, credit card rates can average 13-20%, versus about 6.5% to 9% (as of this writing) for home equity lines of credit (HELOCs) or home equity loans (HEL).

With home equity, you can generally receive larger amounts of money than with a personal loan or through a credit card. With home equity loans (HELs), for example, you may be eligible to receive up to 85% of your home value.

Home equity drawbacks

While accessing your home’s equity through a HEL or HELOC can solve some financial problems, you should consider the drawbacks as well as the benefits. If your home value declines, you could end up owing more than it’s worth. Depending on the lender, hefty fees may apply to your HEL or HELOC.

Ultimately, because the loan is secured by the equity you have in your home, you endanger your home if you can’t repay the borrowed sum. With such high stakes, it pays to use your home equity funds carefully.

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 catching up on past-due bills. 

If you’ve already fallen behind on your mortgage payments but the lender hasn’t yet declared foreclosure, a home equity loan might help you pay your  balance while also obtaining enough money to make future payments until you’re back on your feet.

However, a home equity loan requires good credit, especially to get a good interest rate, so if you’re late mortgage payments have impacted your credit, this may not be an option for you. 

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 this period?                                                                                                                                                                                                                     A HELOC could work for homeowners who have the opportunity to reinstate their mortgage by paying the past-due balance. However, a HELOC is a secured loan tied to your home, so a lender may be less likely to offer financing when the home is heading toward foreclosure. It also requires good credit, which again, homeowners who’ve missed mortgage payments may not have.

Reverse mortgage

A reverse mortgage is another way to access your home equity and potentially avoid foreclosure. When you take out a reverse mortgage, you borrow money against the value of your home. You can choose to receive the loan amount as a lump sum, fixed monthly payments, a rolling line of credit or a combination of these. There are no monthly payments and by law, your loan balance can’t exceed the property’s value.  That balance is due when the homeowner sells the property, passes away or stops living in the home for more than a year. To qualify, you must be 62, use your property as your permanent residence and have substantial equity built in your home. 

Home equity agreement (HEA)

With an HEA, you can obtain cash in exchange for a percentage of your home’s resale value. With this type of home equity financing, you aren’t required to make monthly payments, and no interest accrues.

Using a provider such as Unlock, you can receive up to $500,000 in exchange for a percentage of your future home equity. You can settle with Unlock when you sell your home, or any time during your HEA’s 10-year term. This arrangement allows you to live in your home payment-free while enjoying the cash from your home’s equity.

Let Unlock Technologies help you use your home’s equity

Unlock can help you access you home equity without a loan. With a HEA, you can avoid monthly debt payments and interest. Homeowners with equity in their homes, who have high levels of debt or less-than-stellar credit, can qualify.