A forbearance is a financial arrangement that allows you to reduce or defer your payments on mortgages and other types of loans for a limited length of time, usually no longer than a year. You will still need to make up the payments after the forbearance period ends, although the specific terms of payment will depend on the lender and type of loan. A forbearance may also incur additional interest and other penalties, which are identified in the sections to follow.
The Coronavirus Aid, Relief and Economic Security (CARES) Act authorizes a multi-trillion-dollar economic stimulus package that went into effect in March 2020. Among its other provisions, the Act requires that forbearance be offered as an option for homeowners with federally issued mortgages. Mortgages issued by the FHA, VA, and USDA are all covered by CARES, as are Fannie Mae and Freddie Mac mortgages.
Homeowners with mortgages from private lenders may also qualify for mortgage forbearance as a result of COVID-19 under voluntary relief programs. If you have a private lender, contact the lender to learn what your options are.
The CARES Act specifies that federal mortgage lenders cannot charge extra interest for a forbearance, nor can they require homeowners to repay the missed or deferred payments in a lump sum after the forbearance period ends. However, the interest already specified in the mortgage agreement does continue to accrue. Furthermore, the CARES Act doesn’t cover mortgages from private lenders, although the U.S. Consumer Financial Protection Bureau and other agencies have been urging private lenders to exercise flexibility with their borrowers during the COVID-19 pandemic.
A credit card issuer also may offer types of forbearance, or deferment, on your credit card account. These forbearances may take the form of a reduction in your minimum payment or an allowance for skipping payments without incurring additional interest or other penalties. Other options can include a reduction in the interest rate and an increased borrowing limit. A credit card forbearance doesn’t stop the accumulation of interest in your account balance, which can add up quickly. This is particularly true when you’re making minimum payments on an account with a high balance.
The CARES Act also covers most federally backed student loans. CARES automatically suspended payments on student loans until September 2020 without the accrual of interest. CARES also suspended attempts to collect delinquent payments on those loans until January 2021.
After this forbearance period ends, borrowers of covered student loans still have any relief provisions specified in their original loan agreements. Additional forbearances that typically allow interest to accrue often are available. Some loans even allow a deferral of payments without the accrual of interest during the forbearance. In other cases, a government agency may subsidize the accrued interest payments.
Forbearance is a short-term solution to financial setbacks, including those resulting from the COVID-19 pandemic. The costs of forbearance can include the accrual of additional interest and other financial penalties. Check the terms of any forbearance agreement carefully before agreeing to it and speak with a financial advisor about the best plan for you.