What to consider before you choose forbearance

As a last resort, loan holders may decide to ask their lenders to grant forbearance when they are unable to make a mortgage payment. A forbearance is a reprieve to borrowers from making any payment until an agreed-upon time.

It is not, however, loan forgiveness. Nor is it the end of the road.

Whether it’s paid in a lump sum at a later date, added to the end of the loan, or spread out over several payments, a forbearance can give borrowers a second chance.

While this option may seem palatable given the economic circumstances, it is not for everyone for various reasons.

Job loss or unforeseen financial hardship arising from the coronavirus crisis may be some of the reasons borrowers turn to this eleventh-hour option. Borrowers in need stand to benefit from this arrangement. It gives them an instant financial boost when it’s needed the most and provides a sense of hope for better days to come.

At the same time, there are some pitfalls if the forbearance process isn’t appropriately carried out.

For instance, payments are put on pause, but what happens if the borrower is unable to find work or other financial resources to pay back as promised? This surely is a worst-case scenario, but not out of the realm of possibilities, unfortunately.

Therefore, it’s vital to ask as many questions as possible of the loan servicer about certain circumstances and the alternatives.

Congress passed protections for those in this financial predicament.

The CARES Act applies to federally backed mortgages and is laid out to protect the credit of people seeking a forbearance arrangement – but that is not enough. It’s the borrower’s responsibility to track their monthly statements and credit report to ensure accuracy. Not doing so can result in a double negative: financial setbacks and a downgraded credit ranking.

Borrowers must keep in mind that forbearance is a temporary fix, a short-term relief. Refinancing the loan may not be doable for more than a year.

A forbearance may be untenable given the possible setbacks and roadblocks put up as borrowers do their best to make good on the payments.

The temporary relief can cause long-term pain.

You could consider an alternative: With enough household income, a cash-out refinance could provide stability for the long haul.

By accessing the equity in your home, you can create a cash cushion that can be used to pay unexpected bills and debt in a timely manner, saving you from further financial pain and possible long-term credit damage.

Additionally, borrowers with a 15-year loan may be able to stretch it out to 30 years, potentially leading to substantial monthly savings.

As things eventually begin to turn for the better, borrowers can make the necessary adjustments to their monthly mortgage payment to make up extra ground. Even sending an extra payment each year will accelerate the payoff duration and shave off financing costs.

Remember, if you believe you have no choice but to pursue a forbearance, it’s important to note you must contact the loan servicers to make formal arrangements and document a path forward. Secondly, it’s important to exhaust every other resource before taking this drastic step.

If you have questions about protecting your financial health and future, contact us today.

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