Wednesday, June 3, 2020 / by Sonya Reiselt
"Forbearance" is a new term many homeowners in Beaufort County have learned this year. Many homeowners have encountered difficulty paying their mortgages and are looking for ways to save their homes. Unemployment benefits are just not enough for most people to cover their mortgage payments.
What, exactly, is forbearance? Simply put, it means putting your mortgage payments on hold for a period of time. Of course, you would want to work with your lender to create a forbearance agreement. You would never want to just stop making payments without doing so, as that could trigger a foreclosure.
To be honest, most lenders would rather not foreclose on a home. It's not financially beneficial for a lender, as they get stuck owning the home. They then have to go through the lengthy and costly process of selling the home at an auction. It makes much more sense for lenders to work out an arrangement with the homeowner, and forbearance is one of those arrangements.
The only downside of a forbearance is that those payments that are put on hold still have to be paid eventually. At first, banks were making homeowners pay it all in one lump sum at the end of the holding period. However, the FHFA issued a statement that mortgages serviced under Fannie Mae & Freddie Mac will not have a lump sum due at the end of the forbearance. Yet that only covers mortgage loans held by Fannie Mae & Freddie Mac. So it's important to discuss these details with your lender when considering forbearance.
Forbearance really is a short term option for those who expect their income to return to what it was before the COVID-19 outbreak. But if your income has been reduced for the foreseeable future, a loan modification may be a better choice.
A loan modification is a situation where you modify the terms of your mortgage with your lender. This is not the same as refinancing. Here are some of the options a loan modification can provide:
• A principal reduction which literally lowers the outstanding mortgage balance providing lower monthly payments. This is the least likely the lender will agree to.
• Getting a lower rate is also a possibility. That seems obvious but in many instances it’s not a “forever” thing but just for a short term.
• Lenders might also agree to extend the term of the mortgage which will also lower the monthly payment. This also means more interest will be paid over the life of the loan.
• A modification can mean switching from an adjustable rate mortgage to the stability of a fixed rate loan.
When you get a loan modification, you have to complete an application, much like when you originally applied for the mortgage. You will need to provide financial information as well as verification of income. The goal is to make sure you can afford the new arrangement.
One modification plan is called a “trial modification” where the lender makes sure you can make the new monthly payment amount for a trial period, such as three months, for example. If those payments are made on time, the existing note will be modified to a program that you can afford.
If you have the choice, a modification might be the better option. Either way, make sure you consult your lender, as well as get professional financial advice before making a final decision.
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