Forbearance periods are meant to be a short-term solution to help homeowners avoid foreclosures. Homeowners who take advantage of mortgage relief, however, must eventually reenter regular payment schedules, and that includes the millions of Americans who entered forbearance during the COVID-19 pandemic. While in forbearance, you can still sell your home. Some homeowners might consider selling if they cannot continue to make mortgage payments when forbearance ends, to take advantage of higher home prices, or for any number of other reasons. No matter why you want to sell, it’s important to note that even if you sell, the lender will be owed the full amount that you didn’t pay back. Learn how selling a home while in forbearance works, whether it’s a good choice for you, and what alternatives you may have for staying in financial health while coming out of forbearance.
What Is Mortgage Forbearance?
Forbearance is a hardship program in which a mortgage lender lets the borrower pause or reduce their payments for a short period of time. “Forbearance gives the parties a breathing period with either lower or no payments where there won’t be a foreclosure started, and the homeowner can become current again,” Andrew Lieb, an attorney specializing in real estate and author of 10 Strategies to Purchase Property Post-Pandemic, told The Balance in a phone interview. Homeowners must apply for forbearance, explaining their situation and providing any required documentation. If approved, there will be a forbearance agreement in which the borrower promises to repay all of the missed payments. Once the forbearance expires, repayment terms can vary. “Each mortgage servicer has their own forbearance plans and agreements depending on the borrower’s financial situations, so it’s best to speak with them directly to weigh all of your options,” Jason Vanslette, a partner with Kelley Kronenberg based in Fort Lauderdale, Fla., told The Balance in an email. Typically, forbearance plans start at three to six months, and borrowers can ask to extend the term as needed. Interest usually continues to accrue during forbearance, and almost all forbearance agreements require full payback of the deferred amounts (either immediately or over a period of time), Vanslette said. There may also be late fees tacked on if the forbearance plan was entered after an initial default.
Can You Sell Your Home During Forbearance?
Selling a home during forbearance is possible, and it could be a good financial move for some borrowers who can’t afford payments when forbearance ends. The key point to keep in mind is that all the deferred amounts and accruing interest must be paid in full before you get any money from the sale. So, you’ll want to know whether the equity in the house is positive or negative or whether you can sell with a profit. For example, if your home is valued at $500,000 and you owe $400,000, you could sell while in forbearance and recoup about $100,000.
Other Options To Consider
If selling your home isn’t an option, but you are worried about how to pay back your forbearance, you do have other options. “Mortgage servicers are very interested in finding alternatives to foreclosures and offer many types of modifications depending on your qualifying financials,” Vanslette said. “Calling your mortgage servicer and requesting a modification application is the first step to that process and common practice with many borrowers.” For example, you can try working with the lender on approving a payment deferment or a loan modification, which changes your loan terms. Another option is refinancing, but it can be challenging, especially if your credit has taken a hit. Some lenders may also require a waiting period as long as 12 months, during which you’d have to make consecutive on-time payments on your mortgage. However, if you were in forbearance under the CARES Act, you are eligible to refinance in as little as three months after your forbearance ends if you make three consecutive payments. Lieb also recommends looking into special programs that may be available in your state or county, but make sure you do so before you default. Once you miss payments, your mortgage interest rate will increase to a penalty rate, and you will likely lose any eligibility to qualify for help, he says.
Buying a House After Forbearance
After going through a rough patch in which you rely on forbearance, you might be wondering how it might impact your future ability to get a mortgage. Most borrowers typically have a waiting period of up to 12 months, depending on the new loan’s requirements. Ultimately, if a lender sees you were in forbearance, they see you as a higher risk because it indicates you were on shaky financial ground. Therefore, it’s likely that you may have to delay any future home-buying plans for some time.
