By Liz Pulliam Weston - MSN
If you're struggling to pay your mortgage, your lender may offer you forbearance. Think twice before you take the deal.
Can you afford mortgage forbearance?
Forbearance is a lender-approved reduction or elimination of your payments for a short time, usually a few months. Until recently, lenders made forbearance offers voluntarily, often in response to a temporary financial setback, such as a layoff, and the deals typically required borrowers to catch up on the missed or reduced payments within a year.
Under the Obama administration's recently announced expansion of the Home Affordable Modification Plan, or HAMP, lenders in the program will be required to offer forbearance to unemployed homeowners for at least three months and in some cases up to six months. Payments must be reduced to 31% of borrowers' incomes.
The details:
• Homeowners must meet HAMP eligibility requirements, which include owner occupancy (no rentals or investment property), a loan balance below $729,750 and an origination date before Jan. 1, 2009.
• Homeowners must ask for forbearance.
• Homeowners can't be more than three months behind with their payments. (They can be current and request forbearance; they just can't be more than 90 days overdue.)
• Homeowners must provide proof they're receiving unemployment benefits.
If a homeowner finds a job within the forbearance period and her regular payments would exceed 31%, she must be considered for a permanent loan modification.
Most such modifications so far have involved reducing the loan's interest rate and/or extending the loan term up to 40 years, but the Obama administration is now offering incentives to encourage lenders to forgive portions of some borrowers' loans.
If borrowers who got forbearance don't qualify for a modification that includes a reduction of their principal, though, they're expected to pay back the difference between their reduced payments and their regular payments, said Brian Sullivan, a spokesman for the U.S. Department of Housing and Urban Development.
"These mortgage reductions are not forgiven," Sullivan said. "They are repaid unless the borrower qualifies for a principal write-down."
If borrowers don't find employment by the end of their forbearance, they may be considered for foreclosure alternatives such as a short sale (in which the lender accepts the sale proceeds as full payment for the loan) or deed in lieu of foreclosure (which allows a homeowner to hand back the house keys in order to avoid full-blown foreclosure).
If your situation isn't too dire, it's possible that forbearance -- either the kind lenders offer voluntarily or the kind required under HAMP -- could get you back on track financially. But forbearance might not work, and it could leave you even worse off.
Here's what you need to consider:
Forbearance typically hurts your credit. When you don't pay lenders what you originally owed them, they typically take their revenge by reporting you to the credit bureaus as making late or partial payments. That can trash your credit scores.
That's certainly been true for the forbearance that lenders have been offering voluntarily, as well as for loan modifications, and it's likely to be true under HAMP forbearance as well, said real-estate expert Ilyce Glink, the author of the book "Buy, Close, Move In!"
When HAMP was first announced, "we were told loan modifications wouldn't hurt people's credit," Glink said. That turned out not to be true, she said, and signing up for loan modifications "destroyed a million people's credit."
How much damage you might suffer depends on how high your scores were to start with, with higher scores taking bigger hits. That's why you shouldn't seek forbearance if you have other ways of paying your mortgage, such as tapping savings.
But you also should be realistic if you're in trouble, because every option that would save your wallet some pain is likely to inflict some damage on your credit history and credit scores, Glink said. Forbearance would certainly have less of an impact than losing your home to foreclosure.
Forbearance may not be enough. Unemployment can last a long, long time, particularly in this recession. Half of the people who are unemployed have been without a job for 19 weeks or more. Even if you should land a job, you still may not be able to afford your mortgage, and there are no guarantees a mortgage modification would help.
"The first question you should ask yourself is, should you be trying to save this house?" said Glink, who runs ThinkGlink.com, a personal-finance site. "Can you catch up? You may think keeping your house is your top priority, but should it be?"
Forbearance may just delay the inevitable. In fact, some housing experts say the real benefit of the HAMP expansions won't be in preventing foreclosures as much as delaying them, since spreading foreclosures out over a longer period may reduce their impact on the fragile housing market.
But if you're likely to lose your house in the end, you may want to stop throwing good money after bad. Instead of making lower payments, you may be better off financially simply making no payments, saving your money and trying to arrange a short sale or letting your lender foreclose.
That's a hard pill for many to swallow, and you shouldn't consider it until you've weighed all your options, as I wrote in "Are you foolish to pay your mortgage?" But if you're deeply "underwater" (owing far more than the house is worth) and your lender isn't helping with a permanent loan modification, letting the house go may be the best of bad options.
If you're struggling, you should:
• Get help. Talk to a HUD-approved housing counselor about your options. You can find referrals here. These counselors are free and are a far better initial option than trusting law firms or others who demand big upfront fees (and who may just sign you up with the same programs as the HUD counselor).
• Make the right decision for you and your family. That could mean fighting to keep your house with everything you've got. It could mean throwing in the towel. Or it could mean something in between. Whatever decision you make, you'll have plenty of company as millions of other homeowners face the same struggle.
Liz Pulliam Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "Your Credit Score: Your Money & What's at Stake." Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board and helps middle-class families cope at Building a Brighter Future.
