What Is Mortgage Forbearance, And Is It Right For You?
No one ever anticipates getting into financial trouble, but life can be unpredictable. If you find yourself struggling to make your house payment for any reason, mortgage forbearance is an option to look into. If you need it, it’s one way to receive temporary relief.
What Is Mortgage Forbearance?
Mortgage forbearance is an agreement for temporarily reduced or paused payments on a mortgage. Forbearance provides a short-term break from monthly mortgage payments that can help you avoid going into foreclosure 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. In this way, you’ll be making up missed payments when you start your mortgage payment again.
Forbearance is often compared to deferment. Deferment is one of several options – also including repayment plans and loan modifications – used to help people return to current payment status after forbearance.
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How Does Mortgage Forbearance Work?
The process of mortgage forbearance begins as soon as you get in touch with your loan servicer, the entity you make your mortgage payment to each month. From there, you can work with your servicer 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’re 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’ll 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’ll likely need to provide some documentation. This 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’s 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’re 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 explain the form of 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.
When Is Mortgage Forbearance A Good Idea?
Mortgage forbearance is never something anyone wants. Depending on what led up to the forbearance, there may be an impact on your credit. However, this negative hit is much less than you would see if you had a foreclosure on your record.
Beyond the financial impacts, there’s also a practical side of this. Forbearance could allow you to get back on your feet and stay in your home during a difficult time. If living where you are long term is no longer possible, you may be able to work with your servicer to gracefully exit your home while getting set for better prospects in the future.
While most people are familiar with forbearance being utilized for relief during COVID-19 or after natural disasters, it’s long been used to help homeowners through temporary hardships like a job loss or other event that puts a strain on their finances.
Pros And Cons Of Mortgage Forbearance
While mortgage forbearance can provide payment relief during temporary setbacks, there are pros and cons to accepting a forbearance plan.
Pros
Forbearance can come with several benefits for those needing a temporary reprieve from their mortgage payment:
- You can temporarily pause or reduce your monthly mortgage payment during a financial hardship.
- Forbearance, together with workout options that follow it, can help you avoid foreclosure on your home.
- The impact on your credit score is less harmful than you would see in a foreclosure.
- You’ll have options for a future mortgage faster than you would if you went all the way through the foreclosure process.
- There are several workout options you may have after the forbearance is over to get caught up and current on your mortgage. Speak with your servicer to see what you qualify for.
Cons
There are many pros, but there are also several things you need to be aware of if you’re considering mortgage relief through forbearance:
- Although less punitive than a foreclosure, there’s typically a negative impact on your credit score associated with forbearance. We’ll get into some limited exceptions to this below.
- It’s important to remember you’re still responsible to make up the missed payments when the forbearance concludes.
- Depending on the way you make up your payments, this could result in higher monthly mortgage payments for the remainder of the loan on a permanent or temporary basis, as well as the possibility of a lump sum payment.
How To Get A Forbearance For Your Mortgage
if you’re considering forbearance, you should contact your mortgage servicer. This is whoever you make your payment to and may or may not be the original lender you closed your mortgage with. Your servicer will talk to you about next steps.
As mentioned above, you should expect to share any information you have around the reasoning and anticipated length of your financial hardship. Beyond that, you’ll likely be asked to share documentation around your monthly expenses. Anticipate sharing documents like account statements so that your servicer can evaluate your situation and make recommendations.
Your servicer will go over next steps and what to expect before you accept anything.
After Mortgage Forbearance
Because it’s designed to be helpful during a temporary financial difficulty, a mortgage forbearance can be quite variable in length. You’ll do regular checkins with your servicer. The important thing to understand is that when your forbearance ends, you’ll be evaluated for one of several alternatives designed to bring you current on mortgage payments.
- Mortgage refinance: If you have enough equity and you’re taking cash out, you can use the proceeds from the refinance to pay off the loan including any missed payments.
- Reinstatement: If the forbearance was strictly a matter of cash flow issues and you now have the funds, you do have the option to pay the total past-due amount to bring your loan current right away. This won’t work for everyone, but it is an option.
- Mortgage deferment: Depending on your mortgage investor and the number of months you were on forbearance, you may have the option to move some or all of your missed payments to be due when the loan is paid off. Under this arrangement, you just resume your previous payment, but the money you owe from the forbearance is paid when you sell the home, refinance or otherwise pay off the loan.
- Repayment plan: If you qualify, your servicer may put you on a short-term repayment plan. Under this, your servicer will add a given amount to your monthly payment temporarily until it’s paid off. This repayment plan can also be applied to your escrow account for taxes and insurance if you have one.
- Loan modification: Your servicer may change the terms of your loan with the goal of adding your missed payments back into your mortgage balance. This will likely result in changes to your interest rate and changes to your loan term.
The goal is to find a way for you to affordably stay in your home, but if that’s not in the cards for you at the end of your forbearance, your servicer may be able to help you exit your home in a way that’s less painful financially and credit-wise than a foreclosure.
- Sell your home: Because property values have gone up substantially over the last several years in many areas of the country, you may find that you will be able to sell your home in order to pay off your mortgage to avoid a negative credit impact related to other alternatives.
- Short sale: If home values have fallen since you took out your mortgage, selling your home may not pay off your balance. You could work with your lender on a short sale. In a short sale, the lender agrees to take less than what they owe on the mortgage to not have to manage the property in the foreclosure. In exchange for you keeping the home in good condition throughout the sale process, your lender may give you some money to help you find a new living arrangement.
- Deed-in-lieu of foreclosure: A deed-in-lieu of foreclosure involves you giving up your home voluntarily rather than going through a total foreclosure process. Again, in exchange for keeping up the property for as long as you have it, you may be able to receive some funding to find your next place.
Mortgage Loan Forbearance: FAQs
Now that we’ve touched on the broader details when it comes to mortgage forbearance, let’s answer a few frequently asked questions.
How long does mortgage forbearance last?
In rare situations, there could be a scenario in which your forbearance lasts for a longer timeframe. In the vast majority of cases however, it’s going to last anywhere between a month and a year. You’ll have to check in with your servicer every month during forbearance.
What is the difference between mortgage forbearance and deferment?
Forbearance refers to the ability to pause or lower your mortgage payment for a period of time during a financial hardship. Deferment is a potential option for dealing with repayment once the forbearance is complete. Deferment involves putting part or all of the money you owe in past-due payments at the back end of your loan to be paid when you pay off the mortgage.
How does mortgage forbearance affect my credit?
In most instances in which you seek forbearance, servicers or lenders will report your forbearance which would negatively impact your credit score. The exception to this tends to be natural disaster forbearances. There’s also no credit impact for those in an ongoing COVID-19 forbearance. It’s worth noting that post-forbearance options like modifications can lower your score and put delays on when you can get your next mortgage. Speak to your servicer and a financial advisor.
Can I refinance while in forbearance?
As noted above, you may be able to pay off the payments missed in a forbearance if you have enough existing equity. Regardless of the reasoning for your refinance, be aware that a lender is going to look at your mortgage payment history. Depending on the circumstances leading to the forbearance, this could cause you to have to wait to get a new mortgage in many cases.
Does interest accrue during mortgage forbearance?
Every mortgage payment you make includes principal and interest (as well as taxes and insurance, if you have an escrow account). If you’re in a forbearance, the amount you pay back will also include any interest that would have been due had you made the payments on time. There are no extra interest charges due to being in forbearance.
It’s worth noting that if you get a modification and the interest rate is higher than the rate on your current mortgage, you could end up paying more interest.
The Bottom Line
If you expect to fall behind on your mortgage payment due to a financial hardship, forbearance can provide temporary relief. In some cases, this can last for up to a year. While you do have to pay back your missed payments, your servicer will evaluate you for one of several options including a deferral of payments, repayment plan or loan modification.
In the event that it’s impossible or impractical for you to stay in your home, your servicer can work with you to help you leave gracefully. In all cases, foreclosure is a last resort.
to see your options so you can make the best financial decision. You can also gain further information on stopping a foreclosure on a home.
