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.

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: 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 reestablish financial footing. Interest still accrues during this period.

Here’s an infographic showing how mortgage forbearance works.

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 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 3-6% (as of this writing) for home equity lines of credit (HELOCs).

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 you receive money based on your home’s equity, you endanger your home if you can’t pay back 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 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.

Harmful home equity practices

When considering ways to tap into your home equity, take precautions against scammers and unscrupulous lenders who use the following practices to defraud homeowners.

• Loan flipping: The lender wants you to refinance often, thereby racking up fees and increasing the amount you repay.
• Bait and switch: Lenders quote loan terms when you apply. Then when you prepare to sign, they pressure you into higher rates.
• Insurance packing: The lender includes products, such as credit insurance, that you may not need.
• Equity stripping: Lenders base the loan amount on your home equity without regard to what you can repay.
• Abuse of mortgage servicing: The lender charges you improperly, even illegally, for fees you don’t owe. They also may not provide accurate statements.
• Home improvement loans: Contractors and lenders work together to persuade you to sign a home equity loan with a high-interest rate. The contractor offers to do home repairs for a specific price if you work with their lender for financing. Then, they have you quickly sign some papers before you realize you are signing a home equity loan agreement rather than a personal loan for the home improvement amount.
• Non-traditional products: The lender may offer atypical products or terms, such as minimum payments that don’t cover even monthly accrued interest.

People most at risk for these schemes include:

• Borrowers of advanced age
• Borrowers with low incomes
• Borrowers with low credit scores

Let Unlock Technologies help you use your home’s equity

Unlock’s professionals can assist you in unlocking the equity in your home 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.

Pay your child’s tuition. Get rid of that heavy credit card debt. Make home repairs and updates. Unlock can help you use your home equity to your advantage.

Learn how you can access your home’s equity today.