When we are faced with financial hardships, we need all the help that we can get to tide us over until we get back on our feet. If you are a homeowner, a mortgage forbearance can be an option to buy you time while you sort out your financial problems without worrying about penalties or foreclosure.
Mortgage forbearance is...
Mortgage forbearance allows a homeowner to get temporary relief through lower monthly payments or by not having to make monthly repayments for a certain period. The type of forbearance will depend on whether you have a government-backed mortgage or privately-owned one.
Mortgage forbearance also benefits the loan owner as it helps them prevent losing more money because of foreclosures, Investopedia said. But the same could not be said for loan servicers, who do not own the loan but merely collects payments and so have less financial risk exposure.
Mortgage forbearance is initiated by a homeowner and must show justifiable cause for a request or repayment postponement such as a job loss, major illness, natural calamities, or any situation that impacts their ability to pay the mortgage.
To apply for mortgage forbearance, homeowners will need to prepare documents including recent mortgage statement, current monthly income estimate, current monthly expenses estimate, and an explanation of the financial hardship.
Please note that a mortgage forbearance is not a waiver - it does not erase what you owe, you will still pay them. A mortgage forbearance will not appear on your credit report if your lender so agrees. However, if it does get reported to credit bureaus, a mortgage forbearance is less damaging to your credit as compared to a missed payment.
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Mortgage forbearance and the CARES Act
The mortgage bailout program is part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was passed by Congress on March 27, 2020, to aid Americans struggling with their Fannie Mae-, Freddie Mac-, FHA-, VA- or USDA-backed loans
The CARES Act made it easier for homeowners to get repayment relief during these uncertain times. Under the CARES Act, those applying for a forbearance need not gather as much documentation as they would in a standard forbearance, LendingTree explained.
Homeowners need to create a written or oral statement stating their financial difficulty due to the pandemic. Some of the documentation that be may included are layoff notice, medical bills, and payslip or check slip indicating reduced earnings.
After applying, a mortgage forbearance agreement will be sent to the borrower's lender outlining the terms of the forbearance. As Money.com explained, credit scores are protected under the CARES Act as direct services must report accounts with forbearance as current to the credit bureaus: Experian, TransUnion, and Equifax.
The mortgage bailout program has benefitted almost 4 million homeowners as of May 7, 2020, a CNBC report said, accounting for $841 billion in unpaid principal. That's 6.1 percent of all Fannie Mae- and Freddi Mac-backed loans.
While CARES Act only covers government-backed loans, homeowners with privately-owned mortgages can still request mortgage forbearance as most lenders provide such options, as well as loan modifications and other repayment options like mortgage refinancing.