Behind on Your Mortgage? Try Forbearance

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Homeowners behind on their mortgage payments may think foreclosure is inevitable, but there is another option: forbearance.

Studies show that avoiding foreclosure is a good idea for a host of reasons. For instance, a home foreclosure can wreck your credit score, knocking it down by as much as 35% in the first year. That means if you had a credit score of 720, a home foreclosure would drive your credit score down to 468—and you wouldn’t want to try getting a loan with that.

Forbearance may be a better option. Unlike foreclosure – or even loan modification – forbearance has long been a key instrument in mortgage lenders’ tool chest. Fannie Mae (Stock Quote: FNM), for example, often turns first to forbearance when a homeowner is ill or unemployed for six months. Once the mortgage holder recovers, or gets a new job, FNMA will restructure the loan terms to include those six months of missed payments, factoring them into the newly restructured loan. Some forbearance plans may require making some kind of payment, but there are those that will demand no payments under the terms of the plan.

How do delinquent borrowers qualify for loan forbearance? Using the FNMA playbook as an example, the first step is for borrowers to contact their lender’s loss mitigation department (usually the same people who handle loan modifications). Be prepared to have two years of financial records on hand, and be ready to write a loan hardship letter requesting a loan forbearance (here’s a good sample letter).

In most circumstances, you’ll likely undergo a financial audit to see if you are a “good risk” of handling future mortgage payments. Your mortgage lender will likely assign you a “loss mitigator” to work with you to restructure your loan. Loss mitigators won’t make the final decision on your forbearance request, but they will make a recommendation on whether you qualify or not. So it’s a good idea to work closely with your lender’s contact, providing all the data requested in a timely manner. One sure way to blow a loan forbearance request is to ignore your loss mitigator’s request for documents or information.

If you’re approved for a loan forbearance, expect your lender to grant you an extension that will last somewhere between three and six months. Once that time is up, and you’re presumably back on your financial feet, you’ll resume paying your mortgage under the newly-restructured terms. In most cases, you won’t need a down payment (although some lenders may ask for one). All accrued interest and those “free” months on non-payment will be factored into your new loan terms.

Nobody’s saying that loan forbearance is a piece of cake. But if you’re laid off, or can’t work for health reasons, forbearance gives you a good shot of keeping your home, and avoid your place being foreclosed and sold before you’ve had a chance to get back on track.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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