What Is Mortgage Forbearance?

What Is Mortgage Forbearance?

Mortgage forbearance is a courtesy some lenders offer borrowers to temporarily lessen the burden of making mortgage payments during times of financial hardship. Lenders offer forbearance with the expectation that regular payments will resume within a short time (typically no more than 12 months) and that payments put on hold in the forbearance period will be repaid with interest.

Payment relief options available through mortgage forbearance include:

• Reduction in your monthly payment amount
• Temporary suspension of monthly payments

To receive mortgage forbearance, you must ask for it. Just as mortgage lenders set their own criteria for loan approval, each has its own standards for deciding to whom it will extend mortgage forbearance.

Learn more >> Options if You Can’t Afford Your Mortgage Payments

Who Qualifies for Mortgage Forbearance?

The only way to know whether you’ll qualify for mortgage forbearance is to ask your lender or loan servicer. When you ask for mortgage forbearance, be ready to explain your financial difficulties and why you expect them to be temporary.

Examples of short-term hardships forbearance might address include:

• Property damage from a storm or other natural disaster
• Temporary income loss due to illness or disability
• Death of a co-borrower
• Divorce or marital separation
• Physical relocation (for a verifiable employment opportunity, for example)
• Short-term increase in household expenses (as for a medical issue)

You should also offer evidence that you’ll have the means to make repayments when forbearance ends. This could include documentation showing your income will increase (due to new employment, an insurance payout, inheritance or similar) or that a short-term increase in expenses will end (upon conclusion of a medical leave or completion of a home repair).

Learn more >> How Do I Get a Mortgage Forbearance?

Repaying Your Mortgage After Forbearance

When forbearance ends, lenders typically expect you to make repayment in one of the following ways:

• Lump-sum payment: This is one large payment that covers the portion of your regular payments you didn’t make during the forbearance period.
• Installments: These installments are added to your standard monthly mortgage payment, for a period of up to 12 months.
• Deferral of payments: Deferring repayment at the end of forbearance adds the sum to the end of your payment term. This can result in significant additional interest charges, making your mortgage more costly overall.
• Mortgage modification: A modification recasts your loan terms, permanently altering your interest rate and/or payment term to make your monthly payments more affordable. (More on this below.)

Learn more >> What Happens When Mortgage Forbearance Ends?

Pros and Cons of Mortgage Forbearance

While forbearance can bring relief under the right circumstances, it’s important to consider the downsides.

Pros

• Avoid selling your house: Mortgage forbearance can afford you an opportunity to get through a short-term reduction in income or increase in expenses without having to sell your house or fall behind on mortgage payments.
• Reduce stress: Reduced or suspended mortgage payments during a time of temporary financial crisis can reduce the stress of coping with job loss, personal loss or disaster recovery.
• Preserve your credit score: If your lender agrees not to report your loan status as “not paid as agreed” during your forbearance period, there will be no negative impact on your credit scores. (More on this below.)

Cons

• Hard to get: If you have less-than-ideal credit (or a spotty history of timely mortgage payments, which can be a cause of reduced credit scores), your lender could deny your request for mortgage forbearance. In that case, you’ll either have to find resources needed to keep up with your mortgage payments, sell the house under less than optimal short-sale conditions or face foreclosure.
• Increased payments later: The transition from the forbearance period, when monthly payments are reduced or suspended, to the repayment phase, when you must make monthly payments in an amount greater than you normally do (or make a lump-sum repayment) can be challenging to your household budget.
• Risk of foreclosure: If for any reason you are unable to make scheduled reduced payments during the forbearance period or repay suspended or partial payments according to terms of your forbearance agreement, the lender can foreclose on your home.

Is Mortgage Forbearance Bad for Your Credit?

During mortgage forbearance, your lender must report your loan as current. In other words, your account should remain in good standing, and forbearance shouldn’t result in missed payments on your report.

However, lenders can attach a comment to the loan account on your report indicating that your loan is in forbearance. If your lender reports your forbearance to the credit bureaus (Experian, TransUnion and Equifax), it could make it more difficult to get approved for credit in the future because lenders may view it as a red flag.

That said, lenders aren’t required to add notation reporting that your mortgage is in forbearance. Before entering into a forbearance agreement, check with your lender to see what their policy is.

Is Mortgage Forbearance a Good Idea?

Whether or not mortgage forbearance is a good idea depends on your personal situation, the nature of your financial hardship and your lender’s willingness to extend the option.

When to Consider Mortgage Forbearance

Consider forbearance if you’re experiencing short-term financial challenges, such as loss of income or increased expenses. As long as you’re confident that the financial hardship is temporary, mortgage forbearance can be a great way to ease the pressure on your budget without putting your home at risk. If your loan servicer agrees to not to report a change in payment status to the credit bureaus, it can even allow you to keep your credit intact.

When Forbearance May Not Be a Good Fit

Mortgage forbearance may not be a good option if you cannot realistically commit to resuming regular mortgage payments within 12 to 18 months—plus beginning to repay all of what you would have paid during the forbearance period at that time.

If you’re not sure when your financial burden will lessen, or if your mortgage lender denies your forbearance request for any reason, consider meeting with a government-approved housing counselor to help come up with a plan.

Frequently Asked Questions

• How Long Does Forbearance Last?

  The length of a forbearance period may be negotiated with some lenders, but the majority of mortgages issued in the U.S. conform with requirements for sale to Fannie Mae and Freddie Mac, the federally chartered corporations that purchase most of the nation’s single-family mortgages issued in the U.S. Fannie Mae stipulates that forbearance agreements should last no more than six months, and gives borrowers the option to seek one or more extensions at the end of that period. Freddie Mac allows for up to 12 months of mortgage forbearance.

• What Are Alternatives to Mortgage Forbearance?

  If you seek but are unable to qualify for mortgage forbearance, your options include the following:

  • Mortgage modification: Under terms of mortgage modification, your lender agrees to a permanent change in the terms of your loan, with the goal of making your payments more affordable. Typically, this entails reducing your interest rate, extending the length of your payment term (adding additional payments and increasing total interest charges) or both.
  • Chapter 13 bankruptcy: If you have income and your financial difficulties are related to debts other than your mortgage, filing Chapter 13 bankruptcy could allow you to keep your home. In a Chapter 13 proceeding, a federal court establishes a plan for you to make full or partial repayment of your debts, and such a plan could permit you to continue to make mortgage payments. This option will have a significant negative impact on your credit, so consider all your options before pursuing it.
  • Short sale: In a short sale, you sell the house and, if there are any net proceeds after you pay off what’s owed on your mortgage, you may be able to put those funds toward another house or other living arrangements. This option requires your lender’s permission.
  • Deed in lieu of foreclosure: With a deed in lieu of foreclosure, you and your lender negotiate an agreement that lets you walk away from your mortgage (and your house) without going through the legal process and expense of a foreclosure. In some cases, you may even be able to negotiate a cash payment from the lender that you can use to find a new living situation.
  • Foreclosure: If all else fails, you may have no recourse but foreclosure, in which you forfeit your house to the lender.
• Is Extra Interest Charged During Forbearance?

  Mortgage forbearance does not normally result in interest surcharges or penalties, but interest charges continue to accrue against the full balance you owe during the forbearance period. Since your balance at the end of forbearance will be greater than it would have been if you’d maintained your regular payment schedule, you’ll end up paying more interest on your loan than you would have if you never accepted forbearance. The quicker you make up any payments that were reduced or suspended during the forbearance period, the less you’ll pay in additional interest.

The Bottom Line

If you are experiencing a temporary financial hardship and confident you’ll be able to resume regular mortgage payments in a year or less, mortgage forbearance could be a great option for getting you through the crisis. As you navigate your hardship, it’s a good idea to keep an eye on your credit. If your lender agreed not to report payments as late or missed, checking your credit report can ensure they keep their promise.