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A couple discusses their mortgage with their bankerWhen you’re struggling to make mortgage payments, you may be wondering what options you have. Mortgage forbearance programs can help provide temporary relief from payments, while mortgage forgiveness can reduce the amount you have to pay back to your mortgage lender. While they may sound similar, they work very differently. If you’re wondering how the different options can help you manage mortgage debt, here’s what you need to know.

Mortgage Forbearance, Explained

A forbearance period means that you can take a temporary break from making payments to your home loan. You can also find forbearance options with other types of loans, including student loans.

Forbearance may be granted by your mortgage lender if you’re experiencing a financial hardship that leaves you unable to make your payments. For example, if you’re laid off from work then you may be able to get a forbearance for your loans.

Depending on the terms of your forbearance agreement with your lender, interest, fees and penalties may or may not accrue on your home loan. If interest does accrue, that could mean you’ll end up with a higher mortgage balance to pay off once the forbearance period ends.

The government has not said when this offer expires. The CARES Act states in Section 4022 that the mortgage forbearance provisions apply during the “covered period.” However, there is no definition in this section of the bill of the covered period. Other sections of the bill describing different benefits mention – and define – “covered period.” A prior version of the bill stated that the mortgage forbearance provisions will continue until the sooner of Dec. 31, 2020, or the termination date of the COVID-19 national emergency, according to Ballard Spahr LLC.

Coronavirus Mortgage Forbearance Options

Mortgage forbearance document The federal CARES Act offers financial relief to homeowners and those who own rental properties. Specifically, the act includes a mortgage forbearance option for homeowners who have a federally backed mortgage. That includes:

If you have one of these mortgages you can request a 180-day forbearance period. During those 180 days, you could pause payments on your home loan or pay a reduced amount. No interest, fees or penalties would be charged during this time. At the end of the 180-day period, you’d have the option to request a 180-day extension, which means you could take up to a year off from making mortgage payments.

Additionally, the act put a temporary halt to foreclosure proceedings. So if you were already behind on your mortgage payments before the act passed, you may be able to avoid foreclosure in the near-term.

The act also allows for mortgage forbearance if you own a multifamily rental or investment property that has a federally backed mortgage. The forbearance period for those properties is 90 days if you can show financial hardship. For example, if you own a duplex and both your renters are unable to pay the rent because of the COVID-19 outbreak, you may qualify for mortgage forbearance.

These options are available for federally backed mortgages. If you don’t have a federally backed loan, you may still be able to get a forbearance from payments. A number of lenders are extending forbearance programs to borrowers affected by the coronavirus. You’ll need to contact your lender to find out what’s available for your home loan.

What Is Mortgage Forgiveness?

Mortgage forgiveness means that some of your mortgage debt is forgiven by your lender, meaning you don’t have to pay it back. This type of mortgage relief is typically associated with loan modifications.

A loan modification means that your lender restructures your loan terms to help make it more affordable. That could involve lowering your interest rate, adjusting your monthly payment or extending your repayment period. In some cases, the lender may agree to forgive some of your mortgage debt if you’re experiencing an ongoing and extended financial hardship.

To qualify for a loan modification, you have to make a good faith effort to make the payments according to the terms set by the lender. If some of your mortgage debt is forgiven, you’ll have to report that amount on your tax return. However, forgiven mortgage debt can be excluded from your taxable income through 2020, meaning any mortgage debt forgiven this year can be excluded from your 2020 income when you file your 2020 taxes next year.

Mortgage Relief Pros and Cons

While taking a break from mortgage payments or getting some of your loan debt forgiven may sound good, it’s important to weigh that against the potential financial consequences.

Federal mortgage forbearance programs associated with the COVID-19 pandemic let you pause payments but you still have to make them up at some point. How this happens can be determined by the lender.

For example, the lender may add those missed payments on to the end of your loan term. That means you’ll be paying off the mortgage that much longer. Alternatively, your lender may restructure your loan to account for those missed payments, which could increase your monthly payment going forward. And in some cases, the lender may expect you to repay the missed payments in a lump sum.

Having to come up with a lump sum of money or seeing your mortgage payments increase could add to your financial strain if the pandemic wiped out your savings or caused your household income to shrink. So it’s important to think long-term about whether mortgage forbearance makes sense.

Mortgage forgiveness associated with a loan modification can help you avoid a short sale or foreclosure. Normally, it has no affect on your credit score. But depending on the terms of your loan modification, forgiveness isn’t always guaranteed – meaning you’d still have to make up those missed payments according to the terms set by the lender.

Other Options for Managing Mortgage Payments

If you can still make your mortgage payments but you want to try to lower what you have to pay, refinancing is another option to think about. When you refinance your mortgage, you replace your existing loan with a new one, ideally at a lower interest rate. Lowering your interest rate or extending your repayment term could result in a lower monthly payment. A refinance calculator can give you an idea of how much you could save.

Refinancing could be a good option if you want to stay in the home and your credit is good enough to qualify for the lowest rates. If you’re not able to get a refinance loan, the last resort option may be selling the property. Selling could get you out from under the mortgage payments if you’re struggling, but you’d have to weigh that benefit against how much it may cost you to rent. In some rental markets, owning a home continues to be cheaper than renting.

The Bottom Line

Mortgage forbearance and mortgage forgiveness can offer some financial breathing room if you’re overwhelmed by your mortgage payments. Coronavirus mortgage relief options can give you up to a year-long break from payments, but it’s important to think about how you’ll manage your loan once that time frame ends. Talking to your lender about mortgage forbearance and forgiveness and getting a mortgage refinance quote can help you decide on the best way to handle mortgage debt.

Tips for Managing Finances in a Crisis

  • Consider talking to a financial advisor about how best to handle mortgage payments. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool can match you with up to three local financial advisors, and you can choose the one who is best for you. If you’re ready, get started now.
  • Aside from mortgage relief, the CARES Act offers other benefits for managing your finances during the pandemic. You may be able to qualify for expanded unemployment benefits if you’re out of work. If you’re receiving a stimulus check, it could help with paying bills or adding the money to savings to draw on to cover your living expenses.

Photo credit: ©iStock.com/kate_sept2004, ©iStock.com/Kameleon007, ©iStock.com/courtneyk

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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