Unless your mortgage loan agreement explicitly states otherwise, there is no reason you cannot sell your home while it’s in forbearance. Whether you’re looking to move to another area or even downsize your home into something more affordable, selling can be one option to consider.
Whether or not you should do so is another story.
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A home mortgage loan is necessary for many homebuyers today, helping them finance the cost of a housing purchase. These loans, which can last for up to 30 years, require homeowners to make regular monthly payments toward the loan’s principal and interest.
If a homeowner suddenly finds it difficult to make their payments as scheduled, they can request that their lender allow the loan to go into forbearance. But what if you want — or need — to sell the property while it’s in forbearance? Is this an option and, if so, are there any limitations for sellers?
What is forbearance?
If a home mortgage borrower gets sick or injured, loses their job, or experiences some other financial hardship, they may struggle to make their monthly mortgage loan payments. To avoid defaulting on the loan, they can often request a loan forbearance from their loan servicer instead.
Forbearance in real estate is when a lender lets a borrower temporarily pause or reduce their monthly loan payments due to an extenuating circumstance. This isn’t the same as forgiving your mortgage obligation; instead, you’ll just be pushing off some of those payments while you get back on your feet.
Each lender is different, but some common reasons for requesting forbearance include if you:
- Fell ill and are undergoing treatment or recovering
- Have been seriously injured, such as in a car accident
- Were laid off or fired from your job
- Experienced significant damage to your home, like during a tornado, flood, or other catastrophic events
In most cases, lenders will ask you to show evidence of your financial hardship.
If you have been unable to earn your usual income or are dealing with unexpected expenses that have impacted your budget, a mortgage loan forbearance may be one way to avoid default with the lender.
How forbearance happens
Borrowers will need to reach out to their mortgage lender or loan servicer to ask about forbearance or other hardship options on the loan. In general, you’ll want to reach out to the mortgage lender as soon as you realize that your monthly payments will be an issue — even if you’re not behind on payments just yet.
If approved, your lender will generally offer you one or more options. You may be able to pause or reduce payments temporarily, then either:
- Pay back the paused amount immediately at the end of the forbearance period
- Pay back the paused amount over a defined period of time (such as a year after forbearance ends)
- Add the balance to the end of your existing mortgage loan
- Repay the paused amount with a separate loan
Missed payments will still continue to accrue finance charges during forbearance, so homeowners should note that this can add to the overall mortgage loan cost.
Selling your home if you fall behind on payments
If your mortgage payments are unexpectedly difficult to manage, you might consider selling the home to get out from under that obligation. A short sale, for instance, might net you a smaller sales price but could help you avoid foreclosure and even allow you to recoup some of your money from the home.
But while this solution can work for many, it isn’t the right choice for all homeowners.
During forbearance, you will build up an additional outstanding debt to your lender. This debt will need to be repaid from the proceeds if and when you sell your home, in addition to any remaining principal mortgage balance. This can significantly cut into any profit you might have walked away with after selling the house.
If your home has negative equity (or very little equity), selling your home could actually be a bad idea. After closing costs and other expenses, like realtor fees, you could net less on your home than you owe your mortgage lender. You would be responsible for paying any remaining balance out of your own pocket once the sale is finalized.
Lastly, you might not be able to sell your home if your mortgage lender has already foreclosed on the property. Foreclosure can happen as the result of missed payments or even forbearance terms that weren’t followed by the borrower. If you have already reached the foreclosure stage with your lender, selling might not be an option any longer.
Alternatives to selling your home in forbearance
If you want to sell your home but cannot keep up with the scheduled payments, you may be able to work with your lender to come up with a solution.
As mentioned above, some loan servicers will allow you to defer your forbearance debt. This means that any accrued debt that built up while you were under forbearance can be added to the end of your mortgage loan, rather than being due all at once or over the course of 12 months.
One other alternative to selling your home is to adjust the terms of your existing mortgage loan. Called a loan modification, this could involve your lender extending your mortgage loan term or, depending on your credit score, even reducing your interest rate. Both of these could lower your monthly payment moving forward.
Should you sell your house in forbearance?
If you find yourself struggling to make your mortgage payments as agreed, asking your lender or loan servicer about mortgage loan forbearance could help you get back on your feet and also avoid foreclosure.
Forbearance isn’t right for everyone, though, and could limit your ability to sell your home or even pull from the equity you’ve already established. While it's a beneficial tool in a time of need, homeowners should also be aware of the potential consequences.