Financial trouble can cause you to miss a mortgage payment – or even two – and if you can’t catch up on your payments quickly enough, you could end up in foreclosure. Instead of taking the chance of having your mortgage servicer foreclose on your home, a process that costs both you and the mortgage servicer a lot of money, consider another option, such as forbearance or deferment. These methods allow you to skip or delay your payments if a medical crisis or another emergency drains your finances.
Forbearance is the more common way to save your home. Most mortgage servicers allow a loan forbearance, which is a short-term reduction in payments or even a suspension in payments. You will have to prove that your financial hardship is temporary. Mortgage servicers will usually conduct a financial review before granting forbearance.
If a mortgage servicer agrees to a forbearance, the mortgage servicer is agreeing to give you up to 12 months of no mortgage payments or reduced payments. The mortgage servicer will review your financial information to ensure you can pay the reduced payments during the forbearance period, and they also will determine the number of months to allow for forbearance.
You do have to pay back the forbearance. For example, if a mortgage servicer gives you six months of no payments, you’ll have to pay those six months of payments in a lump sum or spread them out over time – usually 12 months – in addition to your regular monthly payment. You most likely will have additional interest and fees added to the payments you missed. Moreover, the interest continues to accrue, which increases the amount you owe in the long run.
If your mortgage servicer grants a deferment, you are allowed to skip payments. In some cases, a deferment also may pause your interest. If your mortgage servicer agrees to a deferment, always ask about the terms. Unlike a forbearance, you do not have to pay back a deferment. For example, if you are on “Payment #150” and have a medical emergency, you can ask the lender for a three-month deferment. On the fourth month, you begin making your payments again with Payment #150, because the last payment you made was #149. Essentially, the payments are tacked onto the end of your loan, thus extending the loan’s maturity date.
In some situations, the mortgage servicer may require you to make payments in addition to your regular monthly payment. Always ask your mortgage servicer if their policy is to add the payments onto the end of the loan or if they expect you to pay the total amount deferred in small amounts in addition to your monthly payment.
How Forbearance and Deferment Affect Your Credit
If you miss a mortgage payment or payments, mortgage servicers report those missed payments to the credit reporting agencies. In forbearance and deferment, the missed payments are not noted as “late.” However, forbearance and deferment do affect your credit rating.
A mortgage servicer also may report a forbearance or a deferment to the credit card companies. While the hit to your score usually isn’t as bad as if you were delinquent on payments, it still negatively affects your score. However, a mortgage servicer is not required to report a forbearance or a deferment. Ask your mortgage servicer how it treats these options and how each option will affect your credit rating.
Keep in mind that if you foreclose or are delinquent on your payments, your credit is affected for seven years from the date you first became late. In a forbearance or deferment, your score might drop for a few months, but it will come up more quickly than if you had foreclosed.
How Forbearance and Deferment Affect Refinance Options
After you pay back a forbearance, you may not be able to refinance for up to a year. In all cases, mortgage lenders want to see proof that you were able to re-establish your credit. In some cases, before they will consider a refinance, the lender may require you to pay back all the forbearance or deferred amount.
Additionally, even if you paid the forbearance or deferment, the lender that’s refinancing your home may not offer you the lowest interest rate, as they might consider you a higher credit risk. In such a case, you might be able to buy points to get a lower interest rate.
Forbearance and Interest
In some cases, your mortgage servicer may agree to a forbearance, but the interest continues to accrue on the loan amount. Your mortgage servicer can tack the interest payments onto the loan, thus converting it to principal. If you take a six-month forbearance and your payments are $1,000 per month for principal and interest, the interest portion – let’s say $800 per month – is added to the end of the loan as new principal. Now, you’ll be paying interest on what once was interest.
Which Is Best for Me: Foreclosure or Forbearance?
If you have no choice other than foreclosure and would like to stay in your home, forbearance is the least damaging to your finances and your credit score. A foreclosure stays on your credit score for seven years, which means that your credit rating is affected for a seven-year period. If a mortgage servicer doesn’t report a forbearance, it doesn’t affect your credit score. However, even if it does affect your score, it recovers much more quickly than if you had foreclosed.
Before agreeing to a forbearance, make sure you understand, not only the mortgage servicer’s terms, but also if they plan to report the forbearance. Also ask the mortgage servicer if they require you to pay back your missed payments. Find out if the interest accrues or if it is forgiven until you can resume your payments.
Contact Southwest Funding
If you need a forbearance or deferment and we originated your home loan, contact us before you miss a payment. If you are ready to refinance, ask us about our refinance loan program options. We have several loan products available, including FHA, VA, jumbo loans, USDA loans and other specialty loan products. Reach out to us today!
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