How Does Mortgage Forbearance Work?
What is forbearance? Mortgage forbearance is a financial arrangement between a mortgage lender and a borrower. It allows homeowners to temporarily suspend their mortgage payments, generally for the purpose of dealing with a short-term financial crisis. During the coronavirus pandemic, lenders aren’t typically requiring proof of hardship beyond the borrower’s written or verbal statement, although documentation of hardship is a usual requirement to qualify for forbearance.
Forbearance options differ depending on whether your mortgage is with a government or private lender. The terms of your mortgage and your lender’s specific policy on forbearance will also affect your options.
If you have a hardship and believe that you qualify for a forbearance, don’t stop making mortgage payments, assuming that your lender will automatically grant you one. Stopping your payments before your lender has officially granted you forbearance can cause you to be delinquent on your payment, resulting in an adverse impact on your credit score.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 is the federal government’s response to the pandemic’s effect on the economy. This trillion-dollar relief package includes financial aid for homeowners with mortgages that are backed by the government, which is about three-fourths of all mortgages in the U.S. Mortgages owned by Fannie Mae, Freddie Mac, VA, FHA and USDA are all covered by CARES. In general, homeowners with these types of mortgages can qualify for forbearance lasting up to a year. Lenders can’t foreclose on the homeowner’s property during this period, and there are multiple options available for making up the missing payments after the forbearance ends.
Though mortgages with private lenders aren’t covered by the CARES Act and private lenders aren’t required to grant forbearance, many of them are offering additional options for forbearance during the pandemic. These terms are considerably more favorable than they’ve been in the past. One thing that will not change, though, is that homeowners still will have to make up their missed payments at a point specified or negotiated with the lender.
The terms of the borrower’s mortgage essentially remain unchanged during a forbearance, including the interest rate itself. Interest on the mortgage will continue to accrue, even though the interest rate remains the same. For mortgages that have been underwritten by a government agency, the CARES Act specifies that the accrual of interest is calculated as if the borrower had made all payments on time and in full under the original terms of the mortgage.
If the lender changes the terms of the mortgage as a condition for granting forbearance, it is possible that the interest rate could change. It’s therefore critical for borrowers to understand clearly whether obtaining a forbearance from their lenders will result in changes to the original terms of the mortgage.
If you’re currently in forbearance, you may be wondering if you can forgo your house entirely and sell it. We answer that and more in this blog post “can I sell my house while in forbearance?”. Talk to a financial advisor today to learn more.