Can I Sell My House While In Forbearance?
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Times can get tough, and when that happens, making ends meet and paying your mortgage can seem impossible. Fortunately for homeowners, mortgage lenders offer ways to help borrowers experiencing financial hardship. Instead of going straight into foreclosure or being forced to sell your house, you can negotiate a mortgage forbearance.
Mortgage forbearance is when a borrower and lender agree to either temporarily pause mortgage payments or agree to a lower payment amount. This type of loan modification is helpful to homeowners who might experience the loss of a job, illness, or other hardship.
The goal is for the borrower to have a period of reprieve before resuming and catching up on their mortgage payments. It’s important to note that the borrower will still owe the total amount of any missed payments, just at a later date.
Unfortunately, not all borrowers can improve their financial circumstances within the forbearance period. If this happens, they might wonder, “Can I sell my house while in forbearance?” The answer is yes, under the right circumstances.
When Can I Sell During Mortgage Forbearance?
The easiest way to sell a home during forbearance is if the house is worth more than the mortgage. Fortunately for most homeowners, real estate prices have increased significantly over the past few years.
According to MarketWatch, the average American homeowner has over $200,000 in equity. But just because you have a solid equity position doesn’t necessarily mean you can continue making your mortgage payments. Sometimes, it’s best to downsize and reduce your financial burdens.
Can I Sell My House While in Forbearance if I Owe More Than My House is Worth?
Owing more on your mortgage than your home is worth is commonly called “underwater.” In these circumstances, homeowners have two options to avoid foreclosure:
- A Short Sale
A short sale is when you sell your home for less than the mortgage amount with the lender’s approval. - A Deed in Lieu of Foreclosure
A deed in lieu of foreclosure is a financial arrangement where a homeowner who can’t make mortgage payments and is facing foreclosure voluntarily transfers the ownership of their property to the lender.
Keep in mind that both of these options will impact your credit score and make it more difficult to get a mortgage in the future. However, these options are usually slightly less damaging than a foreclosure.
Pros of Selling Your House During Forbearance
If you know that you won’t be able to afford your mortgage payments in the future, and a mortgage refinance isn’t an option, then selling during your mortgage forbearance period might be the best solution.
Your mortgage forbearance allows you to temporarily pause or reduce your mortgage payments. During this period, you can seek out an expert real estate agent, prepare your property for sale, market the property, and negotiate a top sale price.
Some of the pros of selling during your mortgage forbearance period include:
Avoid Foreclosure
As a homeowner, borrower, and hopefully future borrower, it is crucial to avoid foreclosure. A mortgage foreclosure on your credit report can make it nearly impossible to purchase another home for at least seven years.
Selling during your forbearance period helps you get ahead of bank action. It’s always best to sell your house while in forbearance than to let the months roll on until you enter pre-foreclosure and receive a demand letter of Notice of Default.
Protect Your Credit Score
Selling during forbearance can actually help protect your credit score. If the forbearance period ends and you cannot make your monthly payments, then any missed or late payments will negatively impact your credit report.
Mortgage forbearance itself does not directly hurt your credit score. When you enter into a forbearance agreement, you and your lender have agreed to temporarily pause or reduce your mortgage payments. This agreement is a formal loan modification arrangement.
As long as you comply with its terms, your lender should not report missed or reduced payments to the credit bureaus as delinquencies. Forbearance is designed to help and protect borrowers who face unforeseen financial hardship.
However, it’s important to understand a few key points:
- Pre-Forbearance Late Payments
Late or missed payments before entering the forbearance agreement could negatively impact your credit score. - Credit Report Remarks
While in forbearance, your credit report might have a note stating that you are in forbearance. While this note doesn’t affect your credit score, future lenders may consider this if you apply for another mortgage. - Post-Forbearance
You must resume regular payments as outlined in your forbearance exit plan. Failing to meet these terms could result in missed payments being reported, which would negatively impact your credit score. - Long-Term Impacts
Even though forbearance doesn’t hurt your credit score, it could influence future lending decisions. Some mortgage lenders may be cautious about extending credit to someone recently in forbearance.
Time to Market Your Home and Control Over the Selling Process
Selling the home yourself gives you more control over the process and timeline, unlike foreclosure, which the lender controls. It means that you have the time to prepare your home for sale and find a real estate agent. When selling during a forbearance period, it’s important to work with a top real estate agent who knows how to sell a property quickly and for top dollar.
A skilled real estate agent will help you understand the current market trends and set a competitive price that attracts buyers while ensuring you get the most value from your home. They can also advise on repairs or improvements to boost your home’s appeal and value.
With the time allotted during forbearance, your agent will implement effective marketing strategies, including professional photography, staging, social media, and listing your property on popular real estate websites.
If you are selling a home while in forbearance, working with a real estate agent who understands your market and time constraints is important. Find a top real estate agent who will help you get the most out of your home with FastExpert.
Higher Selling Price and Equity Benefit
When you have control over the selling process and timeline, you are almost guaranteed a higher selling price and the equity benefit of that price.
If your property gets foreclosed on, the bank is in charge of the selling process. All the bank cares about is getting their investment returned. They are not motivated to extract any extra equity from the property, as any sale proceeds above their loan balance and fees must be returned to the borrower.
Therefore, the lender will likely accept the first offer that repays their investment, even if it’s considerably lower than the market value.
Debt Relief
Getting out from under crippling debt payments can be life-changing. Don’t underestimate the emotional burden high debt payments cause. Sometimes, your best option is to let go of the house while in forbearance so that you can move on to a brighter future.
If your mortgage lender agrees to a forbearance period, it could be the perfect opportunity for you to look into other options like renting or a smaller home.
Cons of Selling Your House During Mortgage Forbearance
While selling your house during forbearance can offer a way out of a challenging financial situation, it’s not without its downsides. Homeowners must weigh these cons carefully to make an informed decision.
Credit Report Impact
While a forbearance plan itself shouldn’t negatively impact your credit score, that doesn’t mean it won’t leave a mark on your credit report. When you are in forbearance, the mortgage lender usually notifies credit agencies of the agreement. As a result, a note of the forbearance plan is placed on your credit report.
Additionally, the circumstances leading to forbearance might have already caused some damage. Lastly, if the sale of your home doesn’t cover the total mortgage balance, it could result in a ‘short sale,’ which can negatively affect your credit score. This impact can have long-term consequences on your ability to secure loans or favorable interest rates in the future.
Risk of Equity Loss
While a forbearance plan offers a grace period of no or lower mortgage payments, it lasts only three to six months. And this time period might not be the best time to sell a house.
If you’ve not owned the home for long, you might not have built up significant equity. Selling during forbearance, especially in a rushed situation or a down market, might mean selling for less than the home’s potential maximum value.
This situation could lead to a financial loss, where you might not recoup your initial investment or gain any profit from the sale.
Reduced Bargaining Power
When selling a home during forbearance, you are what is often called in real estate marketing, a “highly motivated seller.” Potential buyers who become aware of your situation might assume you’re in a hurry to sell and offer lower prices. This perception can make negotiating a sale that reflects your home’s true market value challenging.
And unfortunately, when you are selling during a forbearance period, you are on a set timeline. That means you don’t have the luxury of waiting for the highest price but instead need to rely on your agent and great marketing. Therefore, when selling during forbearance, you might end up accepting a less-than-desirable offer.
Requiring a mortgage forbearance is never ideal, and having to sell during this time has real downsides. Before selling, consider the possible impact on your credit score, the risk of equity loss, reduced negotiation power, and general market uncertainties.
How to Sell Your House During Forbearance
Selling a home during forbearance is a process. To do it properly and make sure you don’t ruin your credit score, make sure you do your research and follow the proper process. Working with a real estate agent experienced in forbearance sales can help. They will help guide you through each step, ensuring the best outcome.
Use FastExpert to find top real estate agents who know how to handle forbearance and financial hardship sales.
Step 1: Get into Forbearance
Selling a home while in forbearance starts by actually getting into forbearance. First, evaluate your financial condition to determine if you truly need forbearance. It’s meant for homeowners experiencing temporary hardship, like a job loss, medical emergency, or other financial crisis.
If you’ve decided that you need a break from or smaller monthly payments, it’s time to reach out to your lender. It’s best to do this before missing any payments, as missing regular monthly payments will negatively impact your credit score.
Be prepared to explain your financial hardship clearly and honestly. Lenders typically require a valid reason for granting forbearance, such as unemployment, reduced income, illness, or other significant life changes. Your lender may require documentation to support your request. This could include recent pay stubs, bank statements, medical bills, or a letter explaining your situation.
Once your lender offers forbearance, discuss the terms. Understand how long the forbearance period will last, how it will affect your payments afterward, and any fees or additional interest that may accrue. Carefully review the forbearance agreement provided by your lender. Pay close attention to details about the repayment process and what happens after the forbearance period ends.
Ensure that all agreed-upon terms are documented in writing. A verbal agreement is not sufficient. Having everything in writing protects both you and the lender. Ensure that all agreed-upon terms are confirmed in writing. A verbal agreement is not sufficient. Having everything in writing protects both you and the lender.
Step 2: Work with a Real Estate Agent
Ideally, you have started talking to a real estate agent before you finalize a forbearance agreement with your lender. However, if you haven’t, then it’s crucial to engage an agent as soon as the forbearance period starts. Time is ticking, and you only have a limited time to sell your house before your repayments resume.
Start your search with FastExpert, where you can review top local agents and find the best professional for your transaction.
Step 3: Prepare Your Home For Sale
Preparing your home for sale can take some time, so you don’t want to wait. To get the most equity out of your home, it’s important to make sure it shows at its best.
Here are some easy tips to prepare your home for the market without spending too much money:
- Deep clean everything.
- Pack away any clutter or personal items.
- Tidy closets and storage areas.
- Mow and edge lawns.
- Re-fresh flower beds.
- Clean windows.
- Remove or replace dated window covers.
- Make any necessary repairs that fit your budget.
- Add a fresh coat of paint.
Talk to your agent about what changes you can make that will most impact your home’s sale.
Step 4: Market Your Home
Effective marketing is crucial to sell your house quickly and at the best price, especially during forbearance.
Make sure the house’s best features are highlighted. Formulate a marketing plan with your agent that includes:
- Professional Photography
- Social Media
- Web Listing Sites
- Open Houses and Showings
After showings, ask your agent for feedback from potential buyers. Use this information to make any necessary adjustments, whether it’s a price revision or additional home improvements. Remember, the goal is to create a strong, appealing presence in the market that attracts serious buyers quickly.
Step Five: Review Offers and Close the Sale
Once you start receiving offers, review them with your agent. They can help you understand the pros and cons of each offer, negotiate the best possible deal, and navigate the closing process. Closing the sale effectively and efficiently is key, especially under the constraints of a forbearance agreement.
At closing, your mortgage balance and any additional fees you owe the lender will be paid off. After expenses, any remaining equity will go to you, which is why it’s important to maximize your sale price.
Can you sell your house during forbearance and buy a new one?
It is possible to sell your house during forbearance and buy a new one, but it’s not necessarily easy. Although forbearance itself doesn’t directly harm your credit score, the circumstances that led to it might have.
A reduced credit score can affect your mortgage eligibility and the terms (like interest rates) that lenders offer for your next home purchase. Additionally, a note of the forbearance will be put on your credit report, which could impact a future lender’s decision on whether or not to lend to you.
While a mark of forbearance is not as detrimental as a short sale or foreclosure, some lenders may have specific requirements or waiting periods for borrowers who recently exited forbearance.
Talk to your mortgage broker about what kind of lending options are available to you.
Alternatives to Selling During Forbearance
If you’re in forbearance, selling isn’t your only option.
Here are some alternatives to selling during forbearance:
1. Loan Modification
In some circumstances, changing the terms of your loan is possible. A loan modification involves changing the terms of your mortgage to make the payments more manageable. This could include extending the length of your loan, reducing the interest rate, or even reducing the principal amount owed.
Unlike forbearance, it’s a permanent solution that adjusts your monthly payments to a level you can afford based on your current financial situation.
2. Refinancing
Refinancing involves taking out a new mortgage to replace your current one. This can be beneficial if interest rates have dropped or if your financial situation has improved enough to qualify for a better rate.
The goal is to lower your monthly payments, reduce your interest rate, or change other terms of your loan to make it more affordable.
Keep in mind that refinancing usually requires good credit and starting the loan application process from scratch. It might be challenging if your financial situation has led to a decreased credit score.
3. Partial Claim or Balloon Payment
For some government-backed loans, a partial claim might be an option. This involves the lender creating a second interest-free loan for the amount of the forbearance, which is not due until the end of the mortgage or when you sell the home.
Alternatively, some lenders may offer a balloon payment option, where the deferred forbearance amount is due in one lump sum at a specified future date or when the home is sold.
4. Repayment Plan
A repayment plan allows you to catch up on missed or deferred payments over a set period. This involves making your regular monthly payments plus an additional portion of the missed amounts until you’re caught up.
It’s a good option if you can afford to pay more than your regular mortgage payment for a temporary period.
5. Renting Out the Property
If your financial situation allows, renting out your home or a portion of it can generate income to help cover your mortgage payments. It can be a great way to hold onto the home so that you can either sell it during a better market or move back in when your financial health has improved.
Before deciding on any alternatives to selling your home, consult with your mortgage lender and possibly a financial advisor. They can provide guidance based on your specific situation and help you understand the implications of each option.
Takeaways
Whether you’re in forbearance or you think you might have to go into forbearance, it’s best to start by talking to a real estate agent. They can help you understand your equity position and your home’s market value, allowing you to make a plan for your next steps.
It’s crucial to weigh all your options, understand the potential impacts on your financial situation, and consider alternatives such as loan modification, refinancing, or extending the forbearance period.
With a vast network of skilled real estate professionals, FastExpert makes it easy to find an agent who understands your unique situation and can guide you through the process of selling your home during forbearance.
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