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If you can’t afford your monthly mortgage payments temporarily, your lender may have a solution – mortgage forbearance.
While it’s a term we didn’t hear of often before the pandemic, it’s now a common term thrown around in the mortgage industry and is a way to help people in trouble.
If your financial troubles are temporary, here’s what you must know about mortgage forbearance and how it works.
What Is Mortgage Forbearance?
Think of mortgage forbearance as a temporary vacation from your mortgage payments. Lenders award this opportunity when you’re having a financial crisis and can’t make your payments right now.
In 2020, during the heart of the pandemic, Congress made mortgage forbearance possible for every homeowner affected by the pandemic in some way.
If you asked your lender for it, you were able to put your mortgage into forbearance for most of the year.
Today, you have to get approval, and every mortgage lenders and loan program’s forbearance programs work differently.
You must get approval from your lender in writing before assuming you have forbearance protection.
How Does Mortgage Forbearance Work?
Every mortgage forbearance agreement works differently. You’ll work out the mortgage forbearance details with your lender.
You must contact them to apply for forbearance and get approval. Each online mortgage lender has different requirements in how the process works.
In general, the lender approves a temporary halt to your mortgage payments for a specified period.
What you must work out is how much you must pay (if anything) during the period, how you’ll handle repayment of the payments you didn’t make, and if/when the servicer will report the forbearance to the credit bureaus.
Once the forbearance ends, you’ll be on the hook for the amount you didn’t pay. Some lenders may tack it onto the end of your loan.
Others require full payment upfront or offer a payment arrangement, allowing you to spread out the payments over a few months.
>> More: What Is Mortgage Delinquency?
When Does Mortgage Forbearance End?
Your forbearance ends at the end of the term the lender allowed. This means 3 to 6 months for most lenders, but some allow forbearance for as long as 12 months if you can prove you financially need it.
Your lender determines when your forbearance period ends. It’s important to take note of this date because this is when your payments start again and when you may owe a large sum of money depending on the terms you worked out with the lender.
What Are the Advantages of Mortgage Forbearance?
Entering into a forbearance agreement is a serious decision that you shouldn’t take lightly. Knowing the pros and cons can help you decide if it’s right for you. Here are the benefits of a forbearance agreement:
- You’ll have time to figure out your financial situation – If you need a forbearance agreement, you’re likely suffering financially. Taking a break from your mortgage payment gives you some breathing room while figuring out how to move forward. In the 3 – 6 months of the agreement, you can try to get your finances organized and determine how you’ll make your payments moving forward.
- You free up money – If you have other pressing matters that make it hard to make your mortgage payment, such as sudden and unexpected medical bills, you can focus on those while you don’t have to make your mortgage payments.
- You may qualify for a loan modification – If you can’t afford the loan payments after the forbearance agreement to make up the amount you owe, you may qualify for a loan modification. The modification may lower your payment even further, making your mortgage payment more affordable.
- You can avoid foreclosure – If your financial hardship is temporary, you can avoid losing your home while getting yourself back on track.
What Are the Disadvantages of Mortgage Forbearance?
Mortgage forbearance has several disadvantages that you should consider carefully before choosing this option.
- Your credit score may drop – Most lenders report the mortgage forbearance to the credit bureaus. This means your score will likely drop. However, the credit score damage likely isn’t worse than a foreclosure or missing 3 or more months of mortgage payments.
- Your payment may change – Once the forbearance plan ends, you may have to spread the past due payments out over a period of months to make it up. This could increase your monthly payment, making it harder to afford.
- It’s only temporary relief – If you’re entering mortgage forbearance to put off the inevitable, you’ll be right back where you started when payments start up again. It doesn’t change your payment, if anything, it may increase it if you can’t pay the past due amount.
- You may have to extend the term of your loan – If you tack the unpaid amount onto the back of your loan, you may have to extend the term to afford the repayments.
How Does Your Payment Period Change Under Forbearance?
Under mortgage forbearance, your normal monthly payment isn’t required. You are expected to try to make at least partial payments during the period, though.
Any payments you make will come off the past due amount and reduce the amount of interest you owe.
Keep in mind, you’ll receive statements from your lender the entire time, as this is required by law. This doesn’t mean you must make a payment, but it’s a reminder to try to at least pay a little.
How Does Mortgage Forbearance Affect Interest Rates?
Your interest rates won’t change on a fixed-rate mortgage during forbearance – there are no changes. But if you have an adjustable-rate loan, the rates will adjust like they normally do.
If your mortgage rates adjust, your payment will change accordingly, but they won’t be due until the forbearance period.
Interest continues to accrue during the forbearance period, even though you don’t have to pay it while it’s still active.
If you can make payments, though, at least covering the interest will keep your costs down once the forbearance ends.
Does Applying for Mortgage Forbearance Hurt Your Credit Score?
A mortgage forbearance agreement may slightly ding your credit score, but what hurts it the most is if you don’t satisfy the agreement.
For example, if your lender requires you to pay the full amount of the past due payments at the end of the agreement and you don’t, it will hurt your credit score even more.
Before you agree to the plan, make sure you understand the repayment options and that you can afford them.
Is Mortgage Forbearance a Good Idea?
If your financial troubles are temporary, a forbearance can be a good idea. It gives you temporary relief while you get back on track.
If, however, your financial issues are ongoing or you don’t see a resolution anytime soon, it isn’t the right option.
Talk to your lender about the options available to you to help you avoid foreclosure but make your mortgage more affordable. A loan modification is usually the better option in this situation.
Mortgage Forbearance vs. Deferment
Mortgage forbearance and deferment are the same thing. Forbearance is the agreement to pause your mortgage payments, and deferment is to put off your payments for a temporary period.
Your loan servicer must approve both situations, and if you don’t meet the requirements and make your payments on time after the agreement’s end, you could end up in foreclosure.
Bottom Line: What Is Mortgage Forbearance?
A mortgage forbearance shouldn’t be your first answer when you have trouble making your mortgage payments, but it can be an option for temporary financial issues. Not every lender offers them, and every lender that does has different requirements.
Understand the fine print and determine if a mortgage forbearance is the right plan for you or if other mortgage assistance options, like a loan modification or short sale, are a better choice.