Understanding Mortgage Forbearance
If you've experienced a temporary setback — like unemployment, a job furlough, a divorce, the death of a household provider, illness or disability, or a natural disaster like a tornado or hurricane — and you're unable to make your monthly mortgage payments for a short time, don't panic. While many people immediately fear they'll default on their loan or think that foreclosure is imminent, it's not always so cut and dry: there's also forbearance.
What is forbearance?
Mortgage forbearance is a short-term payment relief agreement that lenders can offer borrowers who are experiencing a rough patch. Relief might come in the form of lowering or even pausing monthly payments so that you can avoid foreclosure. Remember, though, unlike a more permanent loan modification, mortgage forbearance is temporary. It must be repaid down the road when your financial hardship is over.
How does mortgage forbearance work?
The specifics of mortgage forbearance vary from lender to lender, and it mostly depends on what type of loan you have, how long you've been making payments, and what the underlying circumstances are. Most mortgage forbearance terms fall squarely into two buckets, both of which are intended to keep the bank from having to foreclose on your property. The two scenarios include:
- your monthly payments will remain on the same schedule, but be reduced, or
- your monthly payments will be suspended altogether for an agreed-upon period
That last part is very important: just how long will the forbearance last? Depending on what the cause of the setback is, and how likely you'll be able to resume full mortgage payments, a forbearance period could cover just a couple of months or last up to a full year. Be alert, though; there may be concessions in the terms, like a one-time fee or a higher interest rate once payments resume.
It's not payment forgiveness
Note that missed payments during the forbearance period are not forgiven; they're deferred. You'll still owe that money, plus accrued interest and taxes. How those deferred payments are repaid is also dependent on the lender's terms. Some may require you to pay the entire amount in a lump sum once regular payments resume. Others may allow the borrower to spread repayment over time, modestly increasing future payments until the mortgage is caught up.
Being asked for partial make-up payments over time is more likely when the circumstances impacting you are also affecting multiple borrowers throughout the community, such as an earthquake, hurricane, or a health emergency that causes significant job furloughs or unemployment.
Another consideration is that if the difficulty you're experiencing isn't resolved by the time your mortgage forbearance period ends — or if it's gotten worse — some lenders may extend your agreement to give you a bit more time.
Mortgage forbearance: How to apply
It's a best practice to contact your lender as soon as you feel you're likely to miss a payment. Why? Certain events, like a natural disaster, may have a time limitation associated with initiating a forbearance, so don't put it off. When speaking with your lender, be prepared to address the following:
- Detail what specifically prompted your forbearance request
- Explain what's already been done to avoid or rectify the situation
- Is this inconvenience expected to be short-term, long-term, or permanent?
It will help to ask your lender to pull up your history of on-time payments. While waiting for a decision on mortgage forbearance, remember to continue making your usual monthly mortgage payments.
Keep in mind that your lender is not obligated to approve a mortgage forbearance request. But when confronted with community or nationwide struggles, they'll likely be inclined to work with you to keep you in your home. If, for whatever reason, you can't come to an agreement, reach out to a housing counselor approved by HUD (the U.S. Dept of Housing and Urban Development.) They can offer independent advice concerning foreclosure alternatives.
Can mortgage forbearance sink your credit score?
Under normal circumstances, unpaid or late mortgage payments will definitely damage your credit. But if circumstances were normal, you probably wouldn't be looking into mortgage forbearance in the first place. Rest assured, if your home loan gets approved for forbearance, and as long as you follow the terms of your agreement, missed payments won't affect your credit score. Just be sure to understand the terms of your agreement and how it will impact your credit before moving forward.
And during your forbearance period, monitor your credit regularly to make sure late or missed payments don't accidentally show up.
Does mortgage forbearance make sense for you?
Mortgage forbearance is not a time-out for those having problems making monthly payments under normal circumstances. It's a temporary solution for a short-term setback. Be sure to consider all options before agreeing to mortgage forbearance: your mortgage payments might be lowered or paused, but they still must be paid.
When all is said and done, the lender just wants the loan to be paid in full and on-time, just as you, the borrower, want to get through these tough times with minimal damage to your credit score and without losing your home.