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Mortgage Forbearance: What It Is And How It Works

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Published on October 22, 2021
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A temporary financial hardship can wreak havoc on your finances. If you’re in danger of falling too far behind on your mortgage payments, forbearance is an option worth considering.

As the borrower, mortgage forbearance can give you the breathing room you need to get back on your feet. Let’s explore what mortgage forbearance is, plus whether this is a good option for your situation. 

What Is Mortgage Forbearance?

Mortgage forbearance is an agreement for temporarily reduced or paused payments on the loan for a specified amount of time. orbearance provides a temporary break from monthly payments. This can help you avoid going into foreclosure during an unexpected 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.

Depending on the circumstances, choosing mortgage forbearance may not negatively impact your credit score. For example, borrowers suffering from a natural disaster or the negative impacts of COVID-19 may be eligible to enter forbearance without affecting their credit score.

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, postpones your missed payments to be paid at the end of the mortgage term in a lump sum. This allows borrowers to keep their monthly payments the same. A deferral may be appropriate if you are able to begin making payments again. But you’ll need to discuss your available options with your lender. 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 your lender if you’re eligible for a loan modification.

Deferral can be helpful for those who are able to resume their monthly payments but can’t afford to repay the balance in full.

How Does Mortgage Forbearance Work?

The process of mortgage forbearance begins as soon as you get in touch with your loan servicer. From there, you can work with your lender to determine whether you qualify for forbearance. You can also go over any other options you may have.

It’s critical to reach out as soon as you realize that you are going to miss your monthly payment. In the event of temporary financial hardship, the sooner you can start the process, the more options you have. When you contact your servicer, you will need to explain the situation. From there, ask which options are available to you.

It’s likely that the servicer will ask a few questions about the situation. Be ready to answer questions like why you are requesting forbearance, how long you anticipate the issue will affect your ability to make payments, and what kind of assistance you’re seeking.

Once you make contact and explain the situation, you will likely need to provide some documentation. These may include your track record of on-time payments or evidence that the hardship you are experiencing is temporary. The process of wading through forbearance can feel overwhelming. That’s completely understandable! It is a good idea to keep a record of all the steps along the way. With a clear record of interactions, you can ensure that you are on the same page as you work together toward a positive outcome.

Until the servicer grants your request for forbearance, you’ll need to do your best to make on-time payments. If the servicer grants your request, the details of the agreement will provide some relief from these monthly payments.

Importantly, 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 And The CARES Act

COVID-19 threw a wrench in the economy with many homeowners experiencing varying degrees of economic hardship.

In response, the CARES (Coronavirus Aid, Relief, and Economic Security) Act was signed into law on March 27, 2020. The goal was to provide assistance to Americans impacted by the crises. This included access to COVID-related forbearance options.

Mortgage Forbearance Extension: When Does It End?

The mortgage forbearance options offered through the CARES Act did not last forever. The original legislation allowed homeowners with qualifying mortgages to apply for forbearance until late 2020. But the most recent extension allowed homeowners to apply until September 30, 2021.

Since then, the option has been extended indefinitely. There will likely be a final cutoff date at some point. But no one can know for sure when that will be. With that uncertainty in mind, it makes sense to move forward with this option sooner rather than later if you qualify.

If granted, the forbearance period can be up to 12 months.

What Happens After Forbearance?

Depending on the agreement you strike with your servicer, forbearance may last for a month to a year. But what happens after the forbearance period ends?

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.

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.

If you’re still struggling to keep up with your monthly payments, it might be time to seek a more permanent solution. A couple good options include requesting a loan modification or a refinance that results in a lower payment. If you can’t obtain a lower payment that fits your budget, you may need to consider downsizing your mortgage payment by selling your current home and finding a new one that you love.

Forbearance FAQs

Does 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, lenders may not report missed payments as long as you follow the terms of your agreement in qualified situations.

For example, if you are seeking mortgage forbearance due to the impacts of COVID-19 or a natural disaster, then your credit score should not be negatively impacted.

In other instances in which you seek forbearance, servicers or lenders will report your forbearance which would negatively impact your credit score. 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, it can be a good idea to monitor your credit score. This is especially true if your forbearance is a result of a natural disaster or COVID-19-related emergency. In those events, monitoring your credit score can help to ensure that your loan forbearance is appropriately reported on your credit score. You can check your credit report for free with Rocket HomesSM.

Does mortgage forbearance affect refinancing?

You may not be able to refinance during a period of forbearance.

But if you are choosing forbearance due to the impacts of COVID-19 or a natural disaster, this choice should not affect your refinancing options after the forbearance period ends. You’ll need to make on-time payments at the end of your forbearance period to pursue refinancing without any negative impacts.

But if you are pursuing forbearance for other reasons, then the negative impact on your credit score will affect your refinancing options.

Are there alternatives to mortgage forbearance?

As with all financial decisions, you can forgo mortgage forbearance in pursuit of another option. Work with your servicer to see if refinancing, seeking a loan modification, or a short sale are options that can apply to you.

The Bottom Line: Is Mortgage Forbearance A Good Idea?

Mortgage forbearance can help you stay in your home while adjusting your finances based on a temporary hardship. If the hardship becomes permanent, then mortgage forbearance might not be the right choice.

Luckily, there are other ways to stop a foreclosure on your home. Take advantage of the free resources offered by Rocket Mortgage as you navigate this tumultuous time.

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