The COVID-19 pandemic unleashed unprecedented devastation on everyday Americans, leaving many jobless and unable to pay back their debts. In light of this situation, federal, state, and local governments have issued an array of moratoriums on debt collection, most notably a federal pause on student loan payments and foreclosures for federally backed mortgages.
But as COVID deaths and cases drop rapidly and the economy reopens, many of the state and local moratoriums have been lifted. The federal moratoriums will also be lifted this year, leaving millions of homeowners and students on the hook. With these extra protections expiring, many borrowers have chosen to enter an agreement known as a forbearance, a temporary reduction in loan payments meant to give the borrower breathing room to get their finances into order.
Don’t get caught off guard- here’s what you need to know about forbearances.
How Are Government Moratoriums Similar To and Different From Normal Forbearances
The government moratoriums on student loan payments simply mean that you can pause your student loan payments without incurring a penalty. They also mean that if you have a certain deadline for paying back the loan in full, that deadline is extended for the same amount of time as the moratorium. For example, if you had a loan due on December 31st, 2025, and the federal moratorium ends up lasting two years, that deadline will be pushed back to December 31st, 2027. This moratorium is in place until September 31st, 2021.
The government moratorium on foreclosure evictions is not like a forbearance program. You are still required to make payments and will pay any penalties or fees for missing them. It simply prevents you from being foreclosed upon. These protections are set to expire on July 31, 2021.
Remember, in both cases, you still owe the full amount of the loan and are responsible for paying the money back!
What is a Forbearance on Student Loans?
A forbearance is an option that you can take if you are having trouble paying your student loans or mortgage. With a forbearance, you will have a temporary reduction in your interest rate and, in some cases, a temporary reduction in your monthly payment.
Forbearance is designed to give you a little bit of breathing room so that you can focus on your finances while you work through the issues that are causing you to have trouble paying your loans.
How Long Does a Forbearance Last?
If you get a forbearance on your loans, then you will have a temporary reduction in your payments.
A forbearance can last anywhere from six months to a year and it can be extended if you are still having trouble paying your loans and you contact your lender and ask for an extension.
If you are struggling to pay your student loans, you can often request a forbearance for up to 12 months.
What Happens if I Miss a Payment on My Student Loans While I Have a Forbearance?
If you are taking a forbearance on your loans, then you will want to make sure that you pay close attention to your payment schedule.
If you do not make your payments on time, then you could risk losing the forbearance and you could also have a negative mark on your credit.
Forbearance is meant to give you some time to get your finances in order, so if you are struggling to pay your loans, it is best that you take advantage of the forbearance while it lasts and then work on getting your finances in order.
What Should I Consider Before I Get a Forbearance?
If you are considering getting a forbearance, then you will want to make sure that you understand what forbearance is and what it is not.
While a forbearance can give you some breathing room to get your finances in order, you will still be expected to pay your student loans as soon as you are able to do so.
You may want to consider getting a forbearance if you are having trouble paying your loans, but you need to be aware of the consequences of forbearance as well.
When you take a forbearance, you could end up losing the forbearance if you do not make your payment on time and you will still be expected to pay back the entire balance on your loan at the end of the forbearance period.
What You Need to Know Before Accepting a Forbearance on Your Mortgage
Like a forbearance on student loans, a forbearance on your mortgage is essentially a temporary delay in your payments, which may give you more time to get your finances in order and prevent you from losing your home. Forbearance on your mortgage will allow you to stop making your mortgage payments for a certain period of time.
The exact amount of time that you will be allowed to stop making mortgage payments will vary depending on your situation, but it is often between three and twelve months.
As you can imagine, this can be a very tempting proposition, especially if you are struggling to make your payments. However, forbearance on your mortgage is not a solution to all your problems. While forbearance on your mortgage can provide you with a much-needed break from making your mortgage payments, it is not a way to avoid foreclosure.
If you are unable to keep up with your mortgage payments after the forbearance on your mortgage expires, your lender will still be able to start foreclosure proceedings. However, forbearance on your mortgage does give you an opportunity to make a plan to catch up on your mortgage payments, or to find an alternative solution.
How to Get a Forbearance on Your Mortgage
For a forbearance on your mortgage, you will need to ask your lender for a forbearance agreement, which will outline the terms of the forbearance on your mortgage.
Keep in mind that a forbearance agreement is not the same as an approved loan modification from the government. If you have an approved loan modification, your lender must follow the terms of the loan modification agreement. However, with a forbearance agreement, you are just asking your lender for more time.
Your lender does not have to honor your request for forbearance on your mortgage. However, many lenders will honor the request, as long as you are current on your payments.
Mortgage Forbearance Restrictions
Another thing you need to keep in mind is that, while you have a forbearance on your mortgage, you will not be able to refinance your mortgage.
You may also be unable to sell your home, or take out a home equity loan, at least until your forbearance agreement has ended.
If you have a forbearance on your mortgage, you may also not be able to qualify for a short sale.
Another thing you need to keep in mind is that you will still be responsible for paying property taxes, insurance, and homeowners’ association fees.
You will also be required to pay the amount of interest that would have been accrued on your mortgage during the forbearance on your mortgage, as well as any fees that your lender charges for the forbearance on your mortgage.
If you are interested in refinancing, contact the loan specialists at Cross Timbers Mortgage. Our experienced mortgage officers will help you review your options to see if refinancing your mortgage could potentially lower your payments and help get you on the path to financial freedom! Set up an appointment today!