The American housing market is an ever-changing amalgamation of hard-working, middle-class people securing one of the best nest eggs for yourself or your family.
However, it is common knowledge that life will throw some hardship your way every now and again. Sometimes when you simply do not have the money to cover your mortgage payment. I would implore the notion that this does happen to everyone at some point, and there are tools you can utilize to help your situation.
A forbearance is an option for people in this position that is a “pause button” on your home loan. It is similar to deferment, however, it has some key elements that make it a better option if you are facing hardship.
Before we dive too deep into the details, the very first thing to know about subjects like forbearance or deferment is that they are weighed by the honor system.
In simple words do not take this path unless absolutely necessary, if your lender happens to find out that you were not facing a real hardship you could be facing mortgage fraud.
The purpose of forbearance is to give a homeowner room to breathe in the event of financial pressure. You lost your job, a family member ended up with a staggering medical bill, you lost your spouse, or you are retired and your investments took a nosedive.
This process can give you 6 months, and sometimes longer, to gain your balance and get back on track. Going into this I can’t stress enough that you need a plan in place as you go through this process.
With both forbearance and deferment, you will owe a lump sum of your missed payments at the end of the dictated period.
Why forbearance is a better option, is because you have the choice to make partial payments at the cost of your home loan still accruing interest. However many lenders will let you add that interest to the end of your loan.
In deferment, the interest halts completely, but at the end of that period, you will pay the entire lump some of all missed payments and interest.
For example, If your mortgage is $1200 a month, and you are still in the first 15 years of your loan, most of that payment is going to interest instead of principal.
If you were to go on a 6-month deferment, you would be on the hook for $7200 to make the loan whole.
With forbearance, you could take a different approach. Say $700 of that payment is interest, you could make small payments of $500 a month to the principal.
Either way, this decision will cost more in the long run, but spreading that toll over a period of time will make it easier to handle. So if your mortgage was $1200 and you only paid $500 to cover the principal, at the end of your period you could ad that interest to the end of your loan. So if you did the numbers right you would owe nothing.
Now you have been able to utilize that extra $4200 over 6 months, and for many middle-class individuals that is enough to get back on track.
This example is very broad and the most important factor is that you have all the information from your lender upfront before you say yes.
If you were to get to the end of that six months and missed something in the fine print, you could be holding a bill you can’t afford yet again.
If this sounds like a last resort, it’s because it is, and there are many options before you get to this point.
If you are looking for a different approach that can help I have one, monthly overhead downsizing.Take a detailed list of every dollar spent in a month, from food and gas to streaming services, and eating out.
If you can delegate what your needs to live are and maybe pay a few things off that are financed you can give yourself a lot of padding financially.
Then in the 2nd or 3rd month if you are diligent take that extra money you are saving and put 90% of it towards your highest interest loan and save the 10% left over for an emergency fund.
This is known by many financial gurus as debt snowballing.
Take on discipline and go after the borrowed money that is hurting you the most. In 6 months if you can reduce your overhead by 30% you will have the money to pay for the most important things like your home.
All in all, forbearance is a tool in the toolbelt in order to avoid foreclosure but if you’re already defaulting on your mortgage, it’s likely not an option. If that’s the case, get in contact with our team right away or read this article to better understand what short sale is and how it can help you get the mortgage relief you’re looking for.