Forbearance became a popular word in the last two years as the COVID-19 pandemic left many Florida families wondering how they would continue paying bills. While many are moving back to their feet in recent months, still others are left wondering if there are options to help them avoid foreclosure or default on outstanding loans.
What are those options? Would forbearance be possible in your individual scenario – and what is the purpose of forbearance, anyway?
Here’s what you need to know about this hot topic:
What exactly is forbearance? When speaking of a loan – such as a student loan or mortgage – forbearance generally refers to a permitted pause in repayment. This postponement is temporary but can be of major benefit to both the creditor and the person who needs the financial relief of forbearance.
The terms of forbearance must be negotiated by the debtor and the company or entity with which they hold a loan or other line of credit. As such, these terms can vary greatly from creditor to creditor.
What is the Purpose of Forbearance?
What is the purpose of forbearance? As mentioned previously, there are benefits for both the creditor and the debtor in this arrangement.
For the debtor, forbearance can grant additional time for repayment. For some people who are struggling financially, this can mean the difference between making loan payments and falling into foreclosure or default.
Likewise, the process of forbearance prevents that default or foreclosure from impacting the agency with which the person holds their loan. Remember, if a person defaults on a loan, that loan never gets repaid. Most agencies or organizations would much rather work out a forbearance arrangement than simply never receive repayment at all!
Does Forbearance Impact Your Credit Rating?
The process of forbearance will not impact your credit score. What may lower your credit score is the missing of payments before forbearance goes into effect, so it is important to apply for forbearance as soon as you possibly can.
It is also important to note that some laws – such as the CARES act that was put into place in 2020 due to the impact of COVID-19 – require that a forbearance be reported to credit bureaus. However, this should not cause your credit score to drop.
The Effect of Forbearance on Refinancing
Typically, forbearance will prevent you from refinancing your home loan. This is because most mortgage providers will not allow you to apply for a new mortgage agreement if you have outstanding payments on your current loan.
However, there are some exceptions. Since individual financial circumstances will vary – and lenders will have different rules about who they allow to apply for a mortgage – you should always inquire with your lender. You never know what opportunities might exist for you to change your situation!
How to Apply for Forbearance
To apply for forbearance, you will need to contact your lender or loan officer directly. You will typically need to prove your need to postpone payments, such as providing financial statements and verifying that you are facing a hardship that will make repayment difficult or impossible in the short term.
Given the fact that forbearance agreements are negotiated between the consumer and the lender, that lender has the final say in whether you receive your forbearance or not. If you have a spotty payment history or a less-than-stellar employment history, it may be difficult to receive forbearance.
The Impact of COVID-19 on Forbearance
As part of the CARES act of 2020, assistance with mortgage forbearance was extended to consumers with a federally backed or federally sponsored mortgage. Some examples of these types of loans include:
- Fannie Mae
- Freddie Mac
Once a person was granted this forbearance, payments were not due for an initial period of 180 days, as well as an additional 180-day extension period.
This gave many Americans the time they needed to secure new employment or otherwise come up with the money necessary to make loan repayments, although not everyone was able to. Not every loan agency was or is willing to continue negotiating extensions. The pandemic has been a tough time for many people’s finances – and has left many families wondering how they will continue to make ends meet.
Can a Forbearance Be Ended Early or Extended?
What is the purpose of forbearance if you no longer need it?
There isn’t much of one, so you may choose to end this period early. If you do, you can either begin making payments on your loan as you normally would, or you can reinstate the amount owed. This means that you would be responsible for repaying the entire loan in one lump sum, however, so this option should only be chosen by someone who has the means to do so!
What if you need to extend your forbearance period?
Some loan agencies or creditors may be willing to extend your forbearance for the same reason they were willing to give it to you in the first place. They would rather receive their money later than not at all.
Unfortunately, not all lenders are so flexible. If your request for an extension is denied, your forbearance will end as scheduled.
The End of Forbearance – What Happens Next?
What happens once forbearance ends? Generally speaking, the end of forbearance means the beginning of repayment. You will once again be responsible for paying back your loan and will be held responsible for missed payments, as well.
In some cases, you may be able to extend or renegotiate your forbearance. However, this is not always guaranteed – and missing payments after a period of forbearance can have just as many consequences as missing them without it.
When Should You Seek Help?
Forbearance – and the things that happen afterward – can be tricky. If you are trying to navigate this process and finding nothing but frustrating along the way, let us help.
At the Van Horn Law Group, our experienced team understands the forbearance process. We have been helping Florida families just like yours steer clear of financial disaster by guiding their choices toward the safest solutions. Whether you just need some legal advice or would like someone to walk beside you through every step of the process, we’ve got you covered. Give us a call today to learn more!