If you are struggling with paying your mortgage on time or have an unexpected financial crisis, mortgage forbearance might be a good option. Mortgage forbearance is when you have an agreement between you and your lender.
It allows you to pause or temporarily stop your mortgage payments or make reduced payments to avoid financial hardship. However, it might harm your credit score.
Mortgage Forbearance Affects Your Credit Score
The effect of mortgage forbearance on your credit will depend on various aspects. If you stop making payments and then enter forbearance, it will most likely significantly affect your credit score; usually, 150 points or more will be deducted from your credit score.
However, if a homeowner continues to make reduced payments during the forbearance period, it may have less impact on their credit score.
Additionally, if a homeowner misses a payment before entering into forbearance, it can also negatively impact credit score in Canada.
In fact, a missed payment can have a chance to stay on your credit report for up to six years. However, forbearance can prevent further missed payments from appearing on the credit report.
Ways to Minimize the Impact of Mortgage Forbearance on Credit Score
• Contact Your Lender Early
It’s essential to contact your mortgage lender in Canada as soon as you think you need to enter into forbearance. They will help you and offer you other options, such as loan modification or repayment plans that can help you avoid forbearance altogether.
• Understand the Terms
In every agreement, you must understand the terms you’re putting yourself into. Ensure that you understand the terms to avoid further problems.
You should know how long it will last and when you need to resume making full mortgage payments. This will help you prepare for the future to avoid causing further harm to your credit score.
• Make Reduced Payments if Possible
If you can afford to pay reduced payments during the forbearance period, it will help minimize the impact on your credit score. Making reduced payments is better than not paying at all.
• Monitor Your Credit Score
Ensure that any negative marks in your credit score are accurate. By checking your credit score regularly, you can detect any inaccurate information early to avoid further harm to your credit score.
How Long Does a Mortgage Forbearance Last?
The Forbearance period will last depending on what agreement you come up with your lender. Mortgage forbearance agreements last for a short period, typically from a few months to a year.
Depending on the deal, you may be required to make reduced payments or nothing during this period.
Once the period is over, you, the borrower, must resume paying the mortgage in full. However, there are some instances that the borrower needs to make a lump sum payment to bring their account current.
In other cases, the missed payments may be added to the end of the mortgage term, effectively extending the life of the loan. It all depends on what agreement you have with your mortgage lender.
It’s essential for borrowers to carefully review the terms of the forbearance agreement and to understand when their payments will resume.
Failing to continue making payments on time can further damage credit scores and put the borrower at risk of defaulting on their mortgage.
If the borrower cannot resume making payments on time, they should contact their lender as soon as possible to discuss their options.
How to Negotiate Your Mortgage Forbearance
- Contact Your Lender. If you are experiencing financial struggles, consult your lender first.
- Explain Your Situation. If you get in touch with your mortgage lender, explain your situation. Provide documents to support your request for forbearance.
- Ask for options available. After explaining your situation, ask for options available for you. The length of forbearance and missed payments will be added to the end of the loan term or repaid in a lump sum.
- Be ready to negotiate with your lender. If the forbearance terms do not align with you, be prepared to deal with your lender. You can request a more extended forbearance period or a lower monthly payment.
- Stay in communication with your lender. Keeping in touch with your lender during the forbearance period is essential. If your financial situation improves, you can resume making payments sooner than anticipated, which can help minimize the impact on your credit score.
- Make sure you understand the terms. Ask any questions you have and ensure you are clear on when payments must resume. Before agreeing to the term, make sure that you understand it fully.
- Consult professional help. If the process becomes overwhelming, consider talking to a housing counselor or financial advisor for additional guidance.
Conclusion:
Mortgage Forbearance is an incredible instrument to facilitate the weight for borrowers who experience a monetary emergency. However, going through such a procedure can be daunting. In Canada, a mortgage forbearance can lower credit scores, but there are ways to lessen this effect.
Keep in mind that forbearance should only be used as a last resort, and it’s important to look into all other options. It is always best to seek professional guidance from a financial advisor or credit counselor if you require clarification regarding how a mortgage forbearance may affect your credit scores in Canada.
Connect with us at Private Mortgage Canada. Call us at +1 416-825-0142.
