Life happens, and sometimes you may experience financial challenges that might jeopardize your ability to pay bills – like your mortgage – on time and in full.
If you’re dealing with financial setbacks from a job loss or an emergency expense (or expenses!) and you’ve fallen behind on your monthly mortgage payments, you may find some much-needed financial relief with mortgage forbearance.
When a lender agrees to grant mortgage forbearance, the lender temporarily forbears (or holds back from) their right to foreclose on a property, granting a homeowner temporary financial relief through suspended or reduced mortgage payments.
While the relief is helpful, there are a few terms and conditions you should be aware of.
Before you consider following through with mortgage forbearance, research the process and find out how it might impact your mortgage interest rate, credit score and more.
Mortgage forbearance offers temporary relief, but it comes with consequences:
- There’s a good chance your credit score will take a dip.
- Interest will continue to accrue during the forbearance period.
- When it’s time to catch up on those missed payments, your new monthly mortgage payment might be higher than your original monthly payment.
It’s important to explore other avenues before deciding whether mortgage forbearance is the right strategy for you.
What Is Mortgage Forbearance?
Mortgage loan forbearance temporarily pauses or reduces your monthly mortgage payments. Homeowners consider forbearance when they know they won’t be able to afford their regular mortgage payments because of financial difficulties, but they expect their situation to improve shortly.
Those temporary financial difficulties can run the gamut from high medical bills to natural disasters and everything in between.
Mortgage lenders know and understand that life happens, too. And when borrowers find themselves in these kinds of difficult situations, lenders may offer mortgage forbearance as a form of temporary assistance, allowing homeowners to pay less or not make any payments.
Here’s what mortgage forbearance isn’t: mortgage loan forgiveness. Eventually, you’ll have to catch up with any amounts that weren’t paid during your payment pause. When your loan comes out of forbearance, your lender will provide repayment options for any missed payments and accrued interest.
What Is a Mortgage Forbearance Agreement?
A mortgage forbearance agreement is a legal agreement between a borrower and a lender.
When a homeowner makes late payments or stops making payments on their mortgage, they risk losing their home through foreclosure. With a mortgage forbearance agreement in place, the borrower is allowed to skip payments or make reduced monthly payments for a set time without worrying about a foreclosure.
Forbearance typically lasts about 3 – 6 months. And, if the situation warrants it, a homeowner can ask their lender for an extension.
If forbearance and forbearance extensions aren’t helping a homeowner catch up on their mortgage payments or improve their financial situation, it might make sense to explore other options, like a loan modification or refinancing.
How Does Mortgage Forbearance Work?
First step: contact your lender.
Qualifying for forbearance will vary by lender, but most lenders will consider factors like the type of mortgage you have and your payment history.
If you qualify for mortgage forbearance, your next step will be to finalize the terms. The forbearance terms can include details like:
- How long the forbearance plan will last
- If the forbearance plan allows for no payments or reduced payments
- Whether the lender will report the forbearance to the credit bureaus
- What payment will look like after forbearance (a lump-sum payment or a repayment plan)
COVID-19 hardship forbearance
At the start of the COVID-19 pandemic, the government announced the COVID hardship forbearance program through the CARES Act. The program applies to all owners of federally sponsored and federally backed loans, including mortgages.
Borrowers who experienced financial distress because of the COVID pandemic and have mortgages through the Department of Housing and Urban Development (HUD), the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), the U.S. Department of Agriculture (USDA) and Fannie Mae or Freddie Mac may be eligible for COVID forbearance.
Other mortgages may qualify for COVID forbearance, but borrowers may have to approach them individually and arrange a forbearance plan on a case-by-case basis.
COVID hardship forbearance has its own unique set of qualifications, deadlines and terms. For example, the forbearance plan ends with a repayment plan, not a lump-sum payment.
What Type of Forbearance Should I Apply For?
There are different types of mortgage forbearance for homeowners to choose from, based on the mortgage loan they have, the requirements and conditions in their mortgage loan and their mortgage loan servicer or lender.
The two main types of mortgage forbearance are:
- Paused payment: All your monthly mortgage payments are temporarily paused. During this time, interest will accrue on your missed payments.
- Mortgage payment reduction: The lender temporarily reduces your monthly mortgage payments. For example, if your mortgage is $3,000 a month, your lender may grant you a 6-month forbearance with a reduced payment of $1,500. During this time, interest will accrue on the outstanding balance of your reduced payments.
How To Apply for Forbearance
If you think you need forbearance, contact your lender and start the process ASAP. Some lenders require that borrowers request forbearance or other types of mortgage assistance within a certain window of time after a disaster or other qualifying event.
To apply for forbearance, you need to:
- Collect any necessary documents that provide proof of financial hardship
- Prepare a detailed explanation of your hardship
- Contact your lender to review your forbearance plan options
Mortgage Forbearance FAQs
If you’re considering mortgage forbearance, you’ve probably got a lot of questions about the process and how it might impact your future financial stability.
How will my current payments be affected?
Once you’re in forbearance, your current payments will either be paused or reduced. After forbearance, you’ll have to pay everything back (plus interest) with a repayment plan, lump-sum payment or loan deferral.
Will forbearance affect my credit score?
Forbearance can impact your credit score. If your lender reports your forbearance to the credit bureaus, it will probably result in a dip in your credit score. But not all lenders report forbearances. Talk to your lender and read the fine print of your forbearance loan terms to confirm whether your lender will report your forbearance.
To be clear – lenders don’t report missed payments during forbearance. They only report that you’re in forbearance.
And we get it. A drop in your credit score isn’t ideal. But a temporary drop in your credit score is easier to bounce back from than delinquencies and missed payments. Every missed payment can have a significant impact on your credit score.
What happens when that forbearance period runs out?
Your mortgage forbearance agreement will clearly indicate how long your forbearance will last. After the period ends, borrowers will have to begin repaying the mortgage payments that were paused or reduced.
The repayment terms will be detailed in the forbearance agreement. Repayment can look like one lump-sum payment or an increase in your monthly mortgage payments. In the end, you’ll be paying back the principal payments, interest, taxes and insurance fees that were not paid during the forbearance.
Can I extend my forbearance?
If you’re still struggling at the end of your forbearance period, you can apply for an extension.
The terms will depend on your lender, but they may grant extensions that last up to 12 months. In some cases, depending on when your forbearance period first started, you might be able to get an extension of up to 18 months.
Extensions aren’t guaranteed. If you’re not approved for an extension, you’ll need to start looking at alternatives that can help you cover your financial responsibilities.
Will forbearance affect refinancing?
You won’t be able to refinance (swap out your original loan with a new loan) while your loan is in forbearance. However, you can refinance after the forbearance period, but you’ll have qualifications to meet.
You’ll have to have made:
- Three consecutive full payments on your loan
- A formal request to your mortgage lender asking for a release from forbearance
The Difference Between a Repayment Plan and Loan Modification
There are a few options available for repayment after mortgage forbearance:
- Repayment plan: The costs of your forbearance will be added to your original monthly mortgage payments for a predetermined period.
- Lump sum: You’ll make a single, large payment for all deferred or discounted payments after your forbearance plan ends.
- Loan deferral: Your missed or reduced payments and fees will be deferred for payment until the end of your mortgage loan repayment term.
Homeowners who need a longer-term solution may want to consider a loan modification. To modify a loan, you have to make a request to your lender to modify the terms of your loan so you can make your monthly mortgage payments more affordable.
You might be able to lower your monthly mortgage payment by extending the length of the loan term, converting from an adjustable interest rate to a fixed rate or by reducing the loan’s interest rate.
Where Else Can I Get Mortgage Payment Assistance?
If mortgage forbearance doesn’t seem right for you, consider other mortgage payment assistance options. You can consider:
- Refinancing: You can refinance your loan to secure a lower monthly payment. A new lender may offer you a lower interest rate or extend your overall loan term.
- Loan modification: You can approach your current lender to discuss modifying your loan to secure a lower monthly payment.
- Selling your home: If rent is significantly cheaper in your area than your mortgage payment, consider selling your home and renting for a while.
Now That You Know the Numbers, Know Your Game Plan
Mortgage forbearance can provide short-term financial relief for homeowners who need an assist during difficult times. While there are downsides to forbearance, its impact won’t be as significant as what you’d experience with late or missed mortgage payments.
U.S. Congress. “H.R.748 — CARES Act.” Retrieved November 2021 from https://www.congress.gov/bill/116th-congress/house-bill/748
Consumer Financial Protection Bureau. “Learn About Forbearance.” Retrieved November 2021 from https://www.consumerfinance.gov/coronavirus/mortgage-and-housing-assistance/help-for-homeowners/learn-about-forbearance/