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What is the difference between a loan modification and a forbearance?

If you are experiencing a financial hardship due to the coronavirus or having difficulty making on time mortgage payments, there are options for you to consider.

 

 

Loan Modification vs. Forbearance

 

Let’s review the differences…

 

 

Loan modifications changes the terms of your secured loans to lower your monthly payments with the end goal of relieving some of the financial pressure.  This option is great for those facing hardship because they’re not dependent on credit score or income and are designed to prevent foreclosure.

 

 

Such modifications can include:

  • Reducing your interest rate
  • Changing a variable interest rate to a fixed one
  • Extending the term length

The downside is that loan modifications can show up on your credit report with a comment code that says something like “paying by modified terms.” However, it’s better to have a loan modification on your report than a foreclosure or missed payments.

 

Mortgage forbearance allows homeowners to pause their mortgage payments while dealing with a short-term crisis. It basically means the lender agrees not to exercise its legal right to foreclose on a mortgage and the borrower agrees to a mortgage plan that will bring the borrower current on their payments within a certain period of time.

 

As part of the recently enacted Coronavirus Aid, Relief and Economic Security (CARES) Act, mortgage accounts in forbearance as a result of COVID-19 cannot be reported negatively to the credit bureaus by lenders. It is also commonly reported that due to COVID-19 lenders are not requiring proof of hardship outside of verbal or written verification from the borrower.

 

 

Before you go into forbearance, make sure you understand what your repayment options are.

 

 

If you have questions about either of these options and/or what is best for you call us at 800- 822-7120. THD Credit is here to help!

-Erik Kaplan

What happens if I can’t pay my credit cards?

When you’re faced with a sudden disruption in your income – something millions of people are experiencing because of the COVID-19 pandemic – credit cards often become a necessity for survival.

 

When plastic is your only option make sure you investigate if and how your credit card company is offering some leniency to those in a financial crisis. Such support could include flexible bill payments and waived late fees.  Your options will vary based on the credit card company and your history as a customer.

 

Many card issuers do offer forbearance programs, which act as temporary relief during financial hardships. While each forbearance program is different, you can typically expect to receive assistance with monthly payments and possibly lowered interest. If you do go this route, your account may continue to accrue interest, but the lender won’t report the late payments to the credit bureaus. Which means there won’t be a negative effect to your credit score.

 

Keep in mind that you have to opt-in to a forbearance program. If you simply skip payments without speaking to your card issuer, your credit score will be affected.

 

Another option to help protect your credit score is to request that your lender includes a statement on your account that indicates you have been affected by a natural or declared disaster. Experian has stated this can help protect your credit history and scores.

 

If you need help during this time, please email me at erik@thdcreditconsulting.com with any questions you may have.

-Erik Kaplan

How can divorce affect my credit?

For most people, divorce is a very difficult and emotionally challenging experience to go through.

Lawyers, mediators and counselors can be available to help navigate through making new living arrangements, custody issues and separating joint finances. However, in the midst of the chaos of the divorce people can overlook situations that ultimately have a negative effect on their credit standing. 

Let me start with the good news.  Divorce itself doesn’t automatically trash your credit scores.

Here are things you should be aware of so you can set yourself up for the best possible outcome:

Joint Credit Card Accounts:  Since these accounts are held by you and your spouse together, both of you are equally responsible for the debt, no matter how it is distributed in the divorce. Creditors will not honor a divorce decree so you both are still liable for that debt. This means if an account is left open, your ex can add more debt, make a late payment, miss a payment or default, and you will also be held responsible.

I recommend you close all joint credit cards and remove your ex as an authorized user from any credit cards which are open in your name only.

Mortgage Debt:  If you have a joint mortgage, and he/she is keeping the home and ultimately relieving you of any future personal financial obligations on the loan there are 3 ways to remove you from the loan:

  1. Co-owner refinances.
  2. You both agree to sell the property and pay off or settle mortgage debt.
  3. Quit claim house to co-owner and file bankruptcy.

Keep in mind that a quitclaim deed has no effect on the mortgage, so even if you are removed from the deed, all parties on the mortgage are still responsible for payments.  To avoid any future issues, hold off on signing the deed over until they have refinanced, and you are no longer on the loan. Also, talk with you lawyer about adding a stipulation to your divorce decree that ensures your ex is obligated to refinance within an agreed upon timeframe.

Auto Loan Debt: The best way to avoid sharing a car loan with an ex-spouse is to either sell the car or remove your or their name from the loan. Auto refinancing is a great way to remove someone from a car loan.  Be sure to retitle the car after the loan has been refinanced.

If you have any questions call us at 800- 822-7120.

Until next time,

THD Credit Consulting

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