Forbearance means refraining from something. In the lending world, it means a creditor is indulging you by giving you some extra time to pay what you owe. In the mortgage world, a forbearance agreement comes into play when you are having trouble coming up with your mortgage payments. When you work out a forbearance agreement, your lender agrees to hold off on its right to foreclose by giving you some breathing room.
Don’t Give Up
If you’ve missed some mortgage payments or know that you will, don’t give up to foreclosure without a fight. Forbearance is a method that could work out for you if your bad times are only temporary. If you are simply in a home that you can’t afford, don’t even ask your lender about forbearance, suggests the Federal Trade Commission.
What forbearance does is to reduce or suspend your mortgage payments for a period of time that you and your lender agree to. Once the forbearance period ends, you not only resume your mortgage payments, you pay a lump sum or additional partial payments to bring the loan current. Traditionally, lenders could decide to agree to forbearance if you were out of work because of a temporary setback and showed good faith that you would soon be working again.
President Barack Obama, under the Making Home Affordable Program, changed the forbearance agreement from a voluntary one on the lender’s part to a mandatory one if the homeowner meets certain qualifications. The house cannot be a rental property (you have to live in it), your loan balance must be less than $729,750 and you had to originate the loan before January 1, 2009. You have to ask for forbearance; it is not automatic. You can’t be more than three months behind in your mortgage payments. You must prove that you are receiving unemployment.
Still in Trouble
If you have a forbearance agreement and you can’t go back to work by the end of the forbearance period, your lender may consider you a candidate for a short sale. This means the lender will agree to let you sell the house for less than what you owe on it. This is better for you than a foreclosure.
Your Credit Score
Forbearance is not supposed to hurt your credit, but it can, depending on how the lender reports the situation to the credit bureaus. For example, under the White House plan, when you begin paying back your mortgage, if your payments exceed 31 percent of your income, your lender must grant you a permanent loan modification. As of 2010, most loan modifications take the form of lowering your interest rate or extending the term of your loan. If that happens, lenders may report that to the credit bureaus, which has a negative effect on your credit score. Real estate expert Ilyce Glink told MSN Money that loan modifications have destroyed “a million people’s credit.” However, keep in mind that applying for a forbearance is still better than losing your home to a foreclosure.
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