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What is mortgage forbearance?

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by Kathryn Parkman ConsumerAffairs Research Team
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Mortgage forbearance is an option for homeowners experiencing temporary financial hardship. It’s usually granted in cases of sudden unemployment, medical emergencies, natural disasters and other short-term crises. Through forbearance, you can reduce house payments or defer for a short period of time (typically under a year).

How does mortgage forbearance work?

In a forbearance agreement, the lender agrees not to foreclose on a financed property, despite the borrower not meeting the original terms of the loan for a certain amount of time.

Lenders typically want to keep you on as a borrower rather than foreclose, so don’t wait to call them when you face significant financial hardship. It’s best for both parties if the loan doesn’t default.

The first step to obtaining a mortgage forbearance agreement is to contact your lender. You’ll want to have some basic information on hand:

  • All loan information, including your loan number, outstanding balance and amount of your current monthly payments.
  • A summary of your situation and why you’re requesting forbearance. For example, if you lost your job, you should be prepared to explain how much you were making, how much you’re able to make now and how long it should take for you to become employed again and back on your feet with a steady income stream.
  • Financial documentation, such as bank statements and pay stubs. Your lender might wait till after you talk to request these.

If your lender deems your situation appropriate for forbearance, you then work with them to develop a short-term plan. Terms of the agreement will vary depending on the status of your loan and your specific lender.

Typically, lenders either agree to reduce your monthly payments or defer them for a set period. Eventually, your payments will return to their previous level and you’ll have to repay the amount that was reduced or deferred.

You will have an option to repay the forbearance amount in a lump sum or as installments added to regular monthly payments. You could also tack it on to the end of your term or potentially qualify for a loan modification.

Mortgage forbearance vs. deferment

People often use the terms deferment and mortgage forbearance interchangeably.

Deferment means all or a portion of your loan payments are suspended and postponed until a future date. It can be a part of your forbearance package if you and your lender agree that deferment is a better option than reduction.

However, a deferment program on its own will typically take the deferred payments and tack them on to the end of your loan rather than working out a payment plan for the end of the deferment period. Sometimes with deferral there’s an option to reduce or eliminate interest accrual for a temporary period, but this is up to the individual lender.

Forbearance agreement vs. loan modification

A forbearance agreement is the plan you and your lender agree to put in place for a temporary amount of time (anywhere from one month to a year). Forbearance can include reduced or deferred monthly mortgage payments. It’s intended to keep you out of foreclosure and allow you time to get back on your feet financially.

Loan modification is a long-term solution much like refinancing — but without the need to formally reapply for a loan. Each loan servicer will have its own criteria for loan modification. Typically, you have to prove that you can keep up with the proposed reduced monthly payment and that you can abide by the terms of a new loan (this usually means a slightly lower interest rate or an extended term).

Mortgage forbearance requirements

In general, you can qualify for mortgage forbearance if you can prove that you’re facing a temporary financial burden or an unforeseen, short-term crisis. You also must prove that you will meet the terms set out in the proposed plan and pay back the deferred costs after the agreement period is over.

However, there are no set rules for who does or does not qualify for mortgage forbearance. All lenders have their own criteria, and you’ll have to explain your specific situation. If you have recurring problems paying your monthly mortgage, a lender is more likely to dismiss your claim. For those with a history of missed payments or frequent trouble making monthly mortgage payments, forbearance is not a good option. Look into loan modification instead.

Under the CARES Act, there are a few extra provisions in place for borrowers who have been affected by the coronavirus pandemic. First, all borrowers financially affected by COVID are eligible for a 180-day forbearance period plus an extension of an additional 180 days if needed. You will not need to prove financial hardship if you are considered eligible.

The CARES Act only covers government-sponsored and government-backed loans, but chances are you have one — these make up 97% of all loans. For HUD, FHA, USDA or VA loans, the deadline to apply is June 31, 2021. Loans backed by Freddie Mac or Fannie Mae currently do not have a deadline.

Second, lenders are required by law not to report your forbearance to credit agencies if it’s due to COVID. Lastly, lenders are prohibited from foreclosing on your loan at the end of the forbearance period regardless of whether you’ve met the terms of the agreement.

Mortgage forbearance pros and cons

If you’re stuck with a sudden reduction of income, reducing or deferring your mortgage payment can make a big difference. Many times all a borrower needs is a few months to get back on their feet to resume monthly payments.

Going through forbearance is far preferable to defaulting on your loan or foreclosure. Forbearance may not impact your credit score at all, depending on the practices of your lender. Even if they do report it to the credit bureaus, it’s far less damaging than a default.

When you default on your loan, your lender can foreclose, which means you will lose your home. If you’re experiencing a financial setback, the last thing you need is to be without a place to live.

But there are still some potential disadvantages. Forbearance is not free money, and any payments you miss during this time will have to be repaid at some point. This includes any accrued interest.

Pros

  • Avoid foreclosure
  • Stay in your home
  • Protect your credit score
  • Short-term financial relief

Cons

  • Deferred payments must eventually be repaid
  • You might pay more per month after
  • Not a long-term solution
  • Could delay future refinancing

Mortgage forbearance FAQ

Does a mortgage forbearance affect your credit?
It depends. It’s smart to ask your lender directly how it reports forbearance agreements to credit bureaus. Some lenders will report that your loan is in forbearance and that you continue to make regular payments. In this case, your credit will be dinged a little, but not as much as it would with defaulting or foreclosure.

It may also hurt your future credit applications or refinancing options if a new servicer sees that you were in forbearance. Typically, a lender wants to see that you repaid all the deferred amounts. Some lenders don’t report forbearance to creditors at all and simply report an on-time payment status.

Does mortgage interest accrue during forbearance?
Yes, your interest will continue to accrue during the forbearance period and will have to be paid back along with any deferred or reduced payments on your principal balance. The method by which this is repaid will depend on your agreement.
Can you refinance your mortgage during forbearance?
No, you cannot refinance during forbearance. You can apply for refinancing after your forbearance period is over. Still, many loan servicers will want to see either the deferred amount paid back in full or a series of consecutive on-time payments under your new post-forbearance payment plan. Additionally, most will want you to wait a period of time afterward to prove that you’re making your payments or that your total deferred amount has been repaid.

Most repayment plans will break up the deferred amount and add them into your monthly payments after your forbearance period ends. If you are not yet financially stable, this could put you even further behind in your finances.

Can you sell your home during forbearance?
Yes, you can sell your home during forbearance. However, it won’t get you out of repaying the loan. Any deferred or reduced payments and accrued interest during your forbearance will have to be paid back upon sale.

Bottom line: What to know about mortgage forbearance

Mortgage forbearance can be a lifesaver for individuals who suddenly find themselves in dire financial straits. Often, a few months is all you need to get back on your feet after a financial setback, and forbearance can be a useful tool to keep your home and your loan current.

That said, it only postpones the payments you’ll have to make eventually — it doesn’t eliminate them. If you can find a way to stay current on your mortgage without forbearance, it might be preferable to a forbearance contract. The first step is always to call your lender to see what options are available to you.

Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. To learn more about the content on our site, visit our FAQ page.
  1. Consumer Financial Protection Bureau. “Learn about forbearance.” Accessed March 25, 2021.
  2. U.S. Department of the Treasury. “The Treasury Department is Delivering COVID-19 Relief for All Americans.” Accessed March 25, 2021.
  3. Consumer Financial Protection Bureau. “CARES Act Mortgage Forbearance: What You Need to Know.” Accessed March 25, 2021.
  4. Fannie Mae. “Forbearance: Know your options.” Accessed March 25, 2021.
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Profile picture of Kathryn Parkman
by Kathryn Parkman ConsumerAffairs Research Team

As a member of the ConsumerAffairs Research Team, Kathryn Parkman believes everyone deserves easy access to accurate and comprehensive information on products and businesses before they make a purchase, which is why she spends hours researching companies and industries for ConsumerAffairs. She believes conscious consumption is everyone's responsibility and that all content deserves integrity.