Financial difficulties don’t discriminate and can happen to anyone. You might’ve heard of a forbearance plan because you’re worried about defaulting on loan payments due to financial difficulties. Forbearance allows you to postpone your loan payments rather than risk missing them and facing foreclosure. Essentially, it suspends your mortgage payments for the forbearance period.
Not sure about what forbearance is and how it works? Keep reading to find out!
What Is Forbearance?
Forbearance is when a lender allows for a temporary postponement or reduction of payments for mortgages or loans. This temporary relief is usually provided to a borrower during times of financial hardship caused by unemployment, natural disasters, illnesses, and injuries.
Bear in mind that forbearance does not erase your debt. It allows you to meet your financial obligations at a future date which means that any payments you miss will have to be paid back to the lender at a later time.
When Do You Qualify for Forbearance?
You have to meet certain conditions of financial strain predetermined by your lender to qualify for payment relief. These conditions include:
- Financial hardship caused by unemployment, business losses, or reduced income.
- Medical hardship caused by severe injuries, long-term disabilities, or serious illnesses.
- Natural disasters, regional or global pandemics, and life-threatening accidents.
Your lender will request a completed application from you if you meet the qualifying conditions. Clarify any queries you have about the forbearance plan with your lender before submitting your application.
How to Repay Missed Payments?
The lender and the borrower usually decide on the specific conditions of the payment relief. If you’re considering a forbearance plan, it is essential to ask your lender the following questions:
- What is the duration of the forbearance period?
- Will the length of my loan be extended?
- Can the postponed payments be amortized over the course of the loan, or do I have to pay in a lump sum?
- What happens if I can’t pay the delayed payments in a lump sum?
- Do you impose any fees during or after the forbearance period?
We recommend that you obtain these answers in writing to safeguard against any future misunderstandings between you and your lender. If you’re given answers via a phone conversation, write down the name of the person you spoke with as well as the date and the time. You can also record the call for added safety.
While forbearance plans can help you out of a financially tough spot, you need to beware of scams that can lead to foreclosure.
Types of Forbearance
Forbearance plans are available for three types of loans: student loans, mortgage loans, and credit card debt.
Student Loans
Student loans can be pretty burdensome and are the most commonly deferred type of loan. Many former students with outstanding loans are likely to place their loans in forbearance at least once. As of November 2020, over 22 million former students were in forbearance with direct loans adding up to $887 billion.
There are two types of forbearance plans available to former students. A discretionary or general forbearance is available to any former student facing financial hardship.
The other type of student loan forbearance is mandatory forbearance. This plan is available to people who are deployed in the National Guard, a part of an internship, or in a medical residency. It’s also available to people whose loan payment is more than 20% of their monthly income. Your loan provider is required to provide forbearance under these circumstances. Hence, it’s called mandatory forbearance.
Don’t apply for student loan forbearance without understanding its risks. Bear in mind that it should only be used as a last resort and that you are still responsible for meeting your payments.
Mortgage Loans
You’re eligible for forbearance on your mortgage loan if you’ve run into financial difficulties. Talk to your bank or lender to see if you qualify for forbearance. Discuss the terms of agreement, the duration of the forbearance period, and payment reductions, if any.
In some cases, you may have to repay the lender at a higher interest rate. However, forbearance can help you avoid foreclosure and save your credit score.
Credit Card Debt
Many credit card companies have forbearance plans to offer you some relief during times of financial hardship. You can talk to a credit counselor from your bank and explain your situation to them. Depending on your situation, it can be better to apply for forbearance rather than miss payments and incur late fees. These actions can considerably lower your credit score.
Forbearance plans to avoid late payments for your credit card can include lowering the minimum payment amount, reducing interest rates, postponing due dates for monthly payments, and canceling late payment fees.
Talk to your bank or lender to find out the type of relief you get. The direness of your situation, the type of card you own, and your credit history help determine the specific type of relief you might receive.
In cases where you cannot repay the postponed or reduced payment, you may have to face foreclosure. However, you may still be eligible to apply for a short sale, a loan modification, or other loss mitigation plans. You need to act quickly to avoid losing your home.
Vilt Law, P.C., Houston, is here to help resolve all your issues with your forbearance plan. Our primary goal is to help our clients avoid foreclosure by taking immediate action. With our expert help, you can save your home without filing for bankruptcy. Talk to our experts about the issues you’re facing, and we’ll strive to resolve them as quickly as we can. You can get in touch with us through our website or call us at (713) 840-7570.