What is mortgage forbearance?

Forbearance meaning

Forbearance is an agreement between the lender or servicer and the borrower that pauses or reduces the borrower's payments for a period of time. Lenders typically allow forbearance, especially on mortgages, during times of economic hardship. For example, if you experience a sudden job loss, you could ask your lender if there’s a forbearance option.

How mortgage forbearance works

The first step is to call your mortgage lender or servicer to ask about relief options as soon as you realize you may need assistance with payments. If your lender puts you on a forbearance plan, you can avoid paying the usual fees for late or missing payments, which can add up quickly.

Forbearance doesn’t mean that your debt is erased — instead, your payments are temporarily reduced or put on pause. You eventually will have to pay back what you owe. Before your forbearance period ends, your lender should contact you about post-forbearance options to repay your missed payments.

These options may include a repayment plan that lets you add extra funds to your regular monthly payment. This can help you bring the payments back up to date over a specified period of time, like 12 months. You can also pay back your forbearance all at once if you’re able to do so — this is called reinstatement.

Mortgage forbearance terms

When you call your lender or servicer to discuss your options, you can expect to hear specific terms in the context of mortgage forbearance.

Amortization

Amortization refers to paying down a loan over time with payments that include principal and interest. Mortgage loans have an amortization schedule, which shows how each monthly payment is allocated toward both components.

Once the forbearance period is over, your lender will present options for paying back what you owe in missed payments. Your amortization schedule can change if you enter a repayment plan.

Interest

Interest is the cost of borrowing from the lender. When you stop making payments as part of mortgage forbearance, the outstanding loan balance stops decreasing but your lender will likely continue to add interest to your outstanding balance.

You may find that your balance is higher when you resume payments due to the accrued interest. Since interest adds up quickly, you don’t want your forbearance period to be much longer than the situation calls for.

Payment schedule

The payment schedule is a list of payment due dates for your mortgage. Like the amortization schedule, your payment schedule will change during the forbearance period and after it’s concluded. Your lender may present a new payment schedule that states when your payments will resume.

Origination

Loan origination is the process of starting a new loan. Lenders often charge a loan origination fee at the beginning of a mortgage (usually as part of the closing costs). The fee is calculated as a percentage of the loan amount. If you decide to refinance your mortgage after a forbearance period, you’ll likely need to pay origination fees since you’re essentially starting a new loan.

Mortgage forbearance pros and cons

For some borrowers, forbearance is the only option in times of economic hardship. It’s important to keep in mind the downsides of delaying payments, however.

Pros

• Short-term solution during a temporary crisis: Mortgage forbearance offers a quick, short-term solution while you work through a difficult financial situation. Forbearance periods are usually up to 12 months, which gives you time to find a new job if you’ve experienced a layoff, for example.
• Can help you stay in your home and avoid foreclosure: The last thing you need during hardship is the added stress — and expenses — you get with a move. Mortgage forbearance can help you stay in your current home and avoid foreclosure while you get back on your feet. Foreclosure has a significant impact on your credit that can affect your housing options in the future.
• A positive lender relationship can help in negotiations: If you have a long history of making on-time payments, your lender may be more willing to work with you on a forbearance plan. These plans are negotiated like any other legal agreement, so you can ask for special considerations like reduced fees and charges.

Cons

• Accrued interest on missing payments: Even though forbearance pauses your payments, the interest on the principal continues to add up. You’ll be responsible for paying that interest once you resume payments.
• Documentation requirement: Lenders may require a substantial amount of documentation when you apply for mortgage forbearance. This may include a detailed explanation of the hardship you’re facing and a list of your monthly expenses.
• Can negatively impact your credit: Lenders can report mortgage forbearance on your credit report as delinquency. This could decrease your credit score and take years to rebuild. They’re not required to report this information to the credit bureaus, however, so ask your lender about its policies before you sign any forbearance agreement.

Alternatives to mortgage forbearance

You may also want to explore loan modification or refinancing options. A loan modification makes changes to the original loan terms (like the interest rate) and changes your monthly payment.

In most cases, loan modifications lower your monthly payment, which can be a significant help if you’re trying to get back on your feet after a life-changing event. (Keep in mind that you may have to show proof of hardship in order to qualify for a loan modification).

Mortgage refinancing lets you take out a new loan to pay off your existing mortgage; the new loan has different terms than the original loan. While refinancing can lower your monthly payments, it also restarts the loan process and often comes with closing costs.

Bottom line

Mortgage forbearance is when a lender or servicer permits a pause or reduction in your payments for a limited time. You may consider seeking forbearance if you’re suddenly laid off from your job or are temporarily under financial stress and can’t keep up with your mortgage obligations.

On the other hand, if your situation appears more long-term in nature, you may want to consider other options. In either case, contact your lender to learn about what options are available.