Going into mortgage forbearance might seem daunting for homeowners facing financial problems they didn’t expect or plan for, but it’s really meant to be a lifeline in those exact situations. Understanding the basic facts about this type of mortgage relief might help alleviate some of the worry. Here, we’ll cover essential forbearance questions.
What is mortgage forbearance?
Mortgage forbearance allows borrowers to pause or lower their mortgage payments while dealing with a short-term crisis, such as a job loss, illness or other financial setback. This can help struggling borrowers avoid becoming delinquent with payments, as well as avoid foreclosure.
Forbearance is also helping protect many borrowers affected by the COVID-19 pandemic. In the case of coronavirus-related requests, most mortgage lenders do not require proof of hardship outside of verbal or written verification from the borrower.
Whatever your reason for needing forbearance, it’s extremely important to talk to your lender or servicer before you stop making payments. Find out from your lender or servicer which type of loan you have and what the forbearance terms are. Even if you qualify for forbearance with respect to the pandemic, you won’t automatically be granted that protection. You must apply for it, and stopping payments before you’ve officially been granted forbearance could make you delinquent on your mortgage and have a serious negative impact on your credit history.
How COVID-19 affected mortgage forbearance
COVID-19 and its economic impact led to expanded mortgage forbearance options for many borrowers. The CARES Act, the federal government’s initial pandemic relief plan, contained help for homeowners with government-backed mortgages, which account for about three quarters of mortgages in the U.S. That includes home loans owned by Fannie Mae and Freddie Mac as well as VA, USDA and FHA mortgages. Borrowers can get COVID-19-related forbearance extended up to 18 months, depending on the type of loan they have.
Along with extended forbearance periods, COVID-19 forbearance plans allow borrowers to enter into a payment plan to repay the paused payments, instead of requiring a lump-sum repayment. Borrowers also do not have to provide proof of hardship.
Does mortgage forbearance hurt your credit?
Mortgage forbearance does not show up on your credit report as a negative activity; your lender or servicer will report you as current on your loan even though you’re no longer making payments.
Again: You must be in touch with your lender about going into forbearance. Do not stop making payments until you’ve officially been extended that protection. Stopping payments before you’re in forbearance will seriously harm your credit.
Do I have to pay extra interest for forbearance?
Borrowers typically won’t have to pay additional interest on their mortgage in forbearance. The amount of interest and interest rate stays the same according to the borrower’s contract.
“During a forbearance plan, interest is not paid but still accrues in accordance with the terms of the note,” explains Tom Goyda, senior vice president, media relations manager at Wells Fargo. “Additionally, as required by the CARES Act, no interest accrues during the forbearance period beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the note.”
The only situation in which the loan interest might change is if the lender extends the loan maturity date or increases the loan interest rate, says Andrew Demers, partner at Weiss Serota Helfman Cole & Bierman in Boca Raton, Florida, specializing in banking and real estate law. Demers points out it’s critical for borrowers to understand the payment terms of the forbearance and ask questions, including:
- Do I have to pay interest or escrow advances during this time, or is this a complete payment deferral?
- Is the loan maturity date being extended?
- Will the lender recapture the deferred through a balloon payment at loan maturity, an extended maturity date or some other catch-up method?
Mortgage forbearance vs. loan modification
Mortgage forbearance is a temporary solution for those experiencing financial hardship. A loan modification, in contrast, changes the original mortgage terms permanently. A modification does not mean you can stop making payments; rather, it helps lower your payments to make them more manageable, either with a lower principal balance, a lower interest rate, an extension of the repayment term or some combination. You might have to provide documentation proving hardship to be approved for a modification.
Post-mortgage forbearance options
If you’re nearing the end of your mortgage forbearance period, you have options.
- If you can afford it, you could repay the missed payments in a lump sum. This will bring your mortgage back to current status.
- You could enter into a repayment plan, which adds an agreed-upon amount to your regular monthly payments so you repay the forbearance amount over a longer time period.
- If you’re still dealing with pandemic hardship, you could ask for a forbearance extension, provided you qualify.
- You could seek a loan modification, which changes the terms of your mortgage so you can better afford the payments.
- If you can no longer afford to stay in the home and are willing to move, you could sell it to pay off the mortgage. If the proceeds aren’t enough, you might be able to complete a short sale in coordination with your lender, which can help you avoid some of the more negative impacts of a foreclosure.
Pros and cons of mortgage forbearance
- Defers or lowers monthly payments temporarily
- Can help prevent foreclosure, or pause proceedings
- Can still sell the home or refinance
- Potential for flexible repayment options
- Must repay missed payments, either in lump sum or with repayment plan
- Payments might increase after forbearance period ends
- Might not be an option for rental properties or second homes, depending on loan type
A mortgage forbearance is not automatic, so you can’t just stop making payments, otherwise your credit score will suffer, and you can end up in default or losing your home. Whether you’re seeking forbearance for the first time, looking for an extension or close to the end of your deferred payment period, stay in communication with your mortgage lender or servicer to discuss your options.