Mortgage forbearance is a period during which your mortgage loan provider reduces or pauses your mortgage payments due to a hardship. It’s most commonly used in cases of loss of income, unexpected medical expenses, and home damage due to natural disasters. Mortgage forbearance is especially prevalent during the current pandemic, as this last year has wreaked havoc on the global economy.
Forbearance can be granted for up to 12 months. During this period, your lender does not foreclose on your home, giving you some time to come up with a solution.
Forbearance does not wipe out your debt. You will still have to repay the full amount of your loan in time, along with any interest accrued during the forbearance period. Some lenders may require that you repay the total amount as soon as your forbearance period ends, while others may be willing to work out a repayment plan.
Forbearance vs. Deferment
Like your forbearance status, mortgage deferment also provides a break in payments for a period of time. However, deferment periods don’t typically accrue interest. Deferment allows you a period of wholly paused or partially reduced mortgage payments.
The most significant feature of deferment has to do with repayment. Deferment takes the amount you owe during your deferral and adds it to the end of your mortgage payments. When your deferral period is complete, you simply pick back up where you left off.
Some homeowners start with forbearance, temporarily pausing or reducing payments. If they are unable to repay the lump sum at the end of that time, they will often take a deferment to help ease the burden further.
Forbearance and Credit Score
Depending on your lender, forbearance may impact your credit score. When in forbearance, lenders are not required to report your status. Some choose not to report it. Others do report the forbearance status, but the credit bureaus provide a special code the lender can use during this time, which causes much less of an impact on your credit score than delinquent payments. Forbearance also prevents foreclosure, which can affect your credit score for up to seven years. On balance, it’s always better to accept a short-term hit from forbearance than the long-term hit that comes with foreclosure and missed payments.
It’s important to note that, during emergencies and special circumstances, federal law sets rules regarding whether forbearance of federally-backed home loans can be reported negatively. Private loans, however, are not subject to those regulations.
When you apply for forbearance, it’s essential that you ask your lender whether they will report it to the credit bureaus. If they do, find out exactly how they report it so you will know what to expect.
Pros and Cons of Mortgage Forbearance Status
Forbearance provides some significant benefits and disadvantages:
1. It lets you avoid foreclosure. One of the main benefits of forbearance is that it allows you to keep your home. When you are struggling with hardship, losing your home is one of the last things you need to deal with. Forbearance allows you to avoid that – at least for a time.
2. Breathing room to find solutions. Forbearance gives you the chance to address whatever issues you are facing without the threat of foreclosure. For instance, if you have been injured or laid off, forbearance gives you some time to get back on your feet.
3. Smaller impact on credit scores. While having no effect on your score is preferable, having a forbearance on your credit report is much better than delinquency and foreclosure.
1. Payments and interest still accrue. Though you do not have to pay them yet, the truth is that your payments and the interest are still piling up. When the forbearance period is over, you’ll be behind on payments.
2. May lead to higher payments. Your lender may work with you to spread what you owe out over several months or longer instead of requiring a lump sum. Unfortunately, this often leads to even higher mortgage payments than you had before.
3. Only helpful for short-term problems. Due to the higher payments mentioned above, forbearance is not a good option for someone who regularly has trouble paying their mortgage. It’s only helpful for short-term issues.
Tips for Using Forbearance
Applying for forbearance is an important decision that should be handled with care. These tips can help you through the process.
Avoid if Possible
Forbearance may seem like the answer to your hardship, but it’s important that you seriously consider it before making any moves. Using this tool tends to add even more financial strain down the line. As such, it’s best to avoid it if at all possible.
If there is any way to continue making payments, do so. If not, consider other options first, such as refinancing your loan for lower payments or sale-leasebacks. This solution lets you eliminate your mortgage altogether by selling your house. You receive the cash but get to continue to stay in your home as a renter. In some instances, you can even repurchase the house when you’re ready.
Apply Before It’s Too Late
If you absolutely cannot make payments and no other options are feasible, apply for forbearance as soon as possible. Do not wait until payment is due or until you have missed your payments. This can impact your credit for years to come. If you must use forbearance, do so as quickly as possible.
Make a Plan
Keep in mind that your forbearance status will not last forever. When it comes to an end, you will need to repay what you owe. Once your forbearance request is approved, immediately begin working on finding a solution for your current financial trouble. Doing so will help ensure you can take on the higher payments when they’re due.
Forbearance can provide temporary relief to many home loan borrowers during times of hardship, but it’s not always the best option. Your mortgage debt and interest continue to grow and can lead to more significant financial trouble in the long run.
Consider less drastic options prior to applying for forbearance. However, if you find yourself out of options, speak to your lender about forbearance as quickly as possible.
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?”.