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Mortgage Forbearance: What It Is And How It Works

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Published on January 26, 2021
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Life is unpredictable. And when the unpredictable happens, it can have an impact on your finances and your ability to meet certain obligations, including your mortgage payment. When things like job loss, illness, natural disaster and other hardship make it temporarily difficult to keep up with mortgage payments, a mortgage forbearance could be a viable solution to protect you from defaulting on your loan or going into foreclosure.

What Is Mortgage Forbearance?

Mortgage forbearance is an agreement for temporarily reduced or paused payments on the loan, for a specified amount of time. This can help you avoid going into foreclosure or ruining your credit during a financial hardship. As part of the agreement, after the forbearance, you’re responsible for paying the amount that was reduced or suspended, in addition to resuming your regular payments.

The forbearance options available to a borrower will depend on the loan’s lender or servicer, the loan type and the entity that backs the mortgage, whether that be a government-sponsored enterprise such as Fannie Mae or Freddie Mac, a federal insurer such as the FHA or the VA, or a private investor.

Mortgage Forbearance Vs. Deferment

People sometimes use the terms forbearance and deferment interchangeably, but these two mortgage relief tools have some key differences that are important to understand.

Deferment or deferral, as it pertains to mortgages, adds missed payments to the end of the mortgage term, allowing borrowers to keep their monthly payment the same. To be eligible for a mortgage deferral, you must be ready to resume making payments.

As you exit your forbearance period, deferral may be one of your options to pay back the mortgage payments that were suspended. Other options include paying the amount in a lump sum, arranging a payment plan to pay it back over time or asking for a loan modification.

Deferral can be helpful for those who are able to resume their monthly payments but can’t afford any of the other repayment options.

COVID-19 And The CARES Act

The CARES Act offers up to a year of forbearance for borrowers who are experiencing financial hardship due to the COVID-19 pandemic.

Also known as the Coronavirus Aid, Relief and Economic Security Act, this act was signed into law on March 27, 2020 with the aim of helping Americans who had been financially impacted by the pandemic. In addition to providing other types of assistance, this law guarantees homeowners the ability to request a COVID-related forbearance.

If you have an FHA, VA or USDA loan, or a loan backed by Fannie Mae or Freddie Mac, you can ask your lender or servicer for a COVID-related forbearance. For this type of forbearance, you don’t need to submit documentation to prove hardship.

How Does Mortgage Forbearance Work?

1. Contact Your Servicer As Soon As You Can

As soon as you face a hardship or know that you’re likely going to miss a payment, contact your loan servicer. Your loan servicer is responsible for receiving your monthly payments and may be different from your lender. When you contact your servicer, explain your situation and ask what forbearance options they may have available. You’ll want to contact them as soon as possible, as many servicers may require you to ask for forbearance within a certain amount of time after certain events, like a natural disaster.

When discussing your situation with your servicer, be prepared to answer such questions as:

  • What has happened to make you request forbearance?
  • Have you taken any steps to rectify the situation?
  • Do you see this issue being long-term, short-term or permanent?
  • What would be a feasible solution for you at this time?

2. Gather Documentation

Your servicer may ask for documents proving your hardship or showing how you’ve tried to resolve the issue. They may also ask for documents that detail your monthly expenses or ones that show your exemplary history as a borrower. A lender or servicer may be more likely to accept forbearance if you have a solid history of on-time payments and if you can prove your financial hardship is temporary and likely to improve.

3. Keep Receipts And Be Responsive

During the forbearance process, document all interactions with your servicer. Make copies of everything you send and ask for returns of receipt, so you know the documents were delivered to the servicer. You want to be as “on top of things” as possible, so make sure you’re communicating well, responding to servicer needs in a timely manner and meeting all of your deadlines.

4. Make Your Payments

While you wait to see if you’re approved for mortgage forbearance, continue to make your payments on time, to the best of your ability.

How Long Does A Forbearance Agreement Last?

Depending on your agreement, a mortgage forbearance can last anywhere from a month to a year.

Keep in mind, there are a lot of factors at work when it comes to deciding how long a forbearance will last. The specific time frame may be influenced by your individual circumstances, how long you need to lower or pause your payments and how your plan is customized to fit your needs.

What Happens After A Forbearance?

There are a few important things to keep in mind when it comes to what happens when a loan goes into forbearance.

To Your Payments

First, it’s important to remember that mortgage forbearance doesn’t get rid of your monthly payments; it lowers or pauses them. And those payments will need to be made up eventually.

To The Interest On Your Balance

Also, the interest on your balance will continue to accrue even when you aren’t making payments and will be added to your balance at the end of your forbearance period. This will increase the total amount you end up paying.

Once a mortgage forbearance ends, you’ll be responsible for making up those paused or lowered payments. To do that, you may have the option to pay a lump sum of the amount owed or spread the amount out by increasing your regular, monthly payments.

Does A Mortgage Forbearance Affect Your Credit?

Late or missing mortgage payments can damage your credit. That’s another reason mortgage forbearance can be such a valuable option for borrowers – if your loan goes into forbearance, most lenders will not report missed payments as long as you follow the terms of your agreement. That means your credit score shouldn’t be affected. Other servicers or lenders will report your forbearance. Talk to your servicer and ask questions to ensure you understand the terms of your agreement and how it will impact your credit.

During your forbearance period, monitor your credit regularly to make sure there are no late or missed payments marked on your report during forbearance. You can check your credit report for free with Rocket Homes®.

Are There Alternatives To A Mortgage Forbearance?

There are several loss mitigation options that are typically made available to borrowers in need of mortgage relief. The options available to you will depend on what your lender or servicer offers and what you’re eligible for.

Options That Allow You To Stay In Your Home

If you want to avoid foreclosure and remain in your home, your options may include working with your lender to create a repayment plan, modify your loan or refinance to a lower payment.

Options That Require You To Leave Your Home

Unfortunately, if you’re in a home you can no longer afford and are facing foreclosure, your loss mitigation options may require you to leave your home.

This could include selling your home, renting it out, or pursuing options that allow you to voluntarily transfer the title of your property over to your servicer in order to clear your mortgage obligations, like a short sale or deed in lieu of foreclosure.

The government also offers help in these types of situations, including free or low-cost credit and housing counseling. The Homeownership Preservation Foundation can also provide resources to homeowners in need.

Is A Mortgage Forbearance Right For You?

Mortgage forbearance is a temporary solution to a financial hardship that homeowners anticipate getting better in the near future. It is not a solution for those who have problems paying their mortgage in general. While mortgage payments can be lowered or paused with this helpful option, they must be made up eventually. If you’re considering mortgage forbearance, make sure you weigh all of your options to get back on track before making a decision.

If you find yourself in a situation that makes it hard to make your mortgage payment due to a hardship, contact a Home Loan Expert to explain what’s going on and get advice tailored to your unique situation.

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