Mortgage forbearance is an increasingly popular option that homeowners struggling to make payments are using to avoid foreclosure, but they have to go about it the right way to prevent it from harming their credit rating. Communication with your lender is the key to obtaining a forbearance without negative consequences.
Mortgage forbearance is a financial arrangement between a homeowner and lender in which the lender agrees to allow the homeowner to make lower payments or defer those payments entirely. The most common use of forbearance is to recover from a short-term financial setback such as the loss of a job or major illness, as the duration of a forbearance is generally limited to one year. You’ll still need to pay the lender the missed or reduced payments after the forbearance ends.
Mortgage lenders have historically reported forbearances to the major credit reporting agencies: Equifax, Experian, and TransUnion. This information can adversely affect a homeowner’s credit, making it more difficult to qualify for any number of different types of loans. However, this general rule has changed with the passage of the Coronavirus Aid, Relief and Economic Security (CARES) Act in March 2020. Lenders still report a forbearance to credit agencies, but the CARES Act requires those agencies to use a special code indicating that the forbearance is the result of a declared disaster, which includes COVID-19. As a result, a disaster-related mortgage forbearance won’t affect your credit score at this time.
Communication With Lenders
It’s essential to contact your mortgage lender as soon as you think you might not be able to make a payment. Explain your situation and learn what your available options are. The CARES Act requires government lenders to grant a forbearance, but private lenders for real estate have much more discretion when it comes to granting or not granting forbearances.
You need to continue making your payments until your lender officially grants you a forbearance, even when the lender is legally required to do so. If you simply stop making payments, the lender will report the lapse to the credit bureaus as a delinquency instead of a forbearance. Even a single missed payment can substantially reduce your credit score and remain on your record for up to seven years.
Review the terms of the forbearance carefully before agreeing to it, especially if your mortgage is through a private lender. In particular, the forbearance agreement should explain whether interest will continue to accrue on the mortgage balance during the forbearance period. The length of the forbearance period is another important term to consider when reviewing the agreement.
Following your repayment plan is another important factor in ensuring that your forbearance doesn’t affect your credit score. You’ll typically start making a larger payment each month after the forbearance period ends to make up the missing payments, but you may opt to make a lump sum payment instead. Either way, it’s important to keep your lender informed of your financial situation as you transition back to a normal payment schedule.
If you’re going through forbearance, it’s important to know how it will affect your credit score. Talk to a financial advisor to be better prepared for the effects of forbearance and to develop a plan.