If you’re concerned about your ability to make your next mortgage payment, working with your lender on a forbearance agreement may be an option. Doing so can help you avoid late penalties, going into default and risking foreclosure.
If you have a federally-backed mortgage, you’ll also be able to take advantage of forbearance protection under the CARES Act, which the Biden administration just extended. You now qualify for up to 15 months of forbearance if you hold an eligible mortgage, and have through the end of June to request the payment pause.
His administration extended the foreclosure moratorium on properties with federally-backed mortgages through the end of June as well.
What is a mortgage forbearance agreement?
Mortgage forbearance is an agreement arranged between you and your lender to provide you with temporary relief from paying your mortgage for a specified amount of time, either by lowering or pausing the payments.
Borrowers typically request forbearance from their mortgage lender or servicer when there’s a change in their financial situation that impacts their ability to pay, such as a major illness, job loss or a natural disaster.
Forbearance doesn’t mean that you’re off the hook for the missed or reduced payments — you’ll still owe the amount you missed at a later date, usually when when the forbearance period ends. During the pandemic, borrowers who have a government-backed loan are allowed to request up to 15 months of forbearance. The first period lasts 180 days, and borrowers must request extensions for additional time. Many other mortgage lenders have offered relief options, including extended forbearance periods and payment plans for when the borrower resumes regular and catch-up payments.
How mortgage forbearance works
The forbearance agreement will depend on the type of loan and your lender or servicer’s policies, but once it’s in place, your mortgage payments will be lowered or suspended for the agreed-upon time frame. In most cases, your loan will still accrue interest, but you’ll be relieved from the possibility of foreclosure.
Once the mortgage forbearance period is over, you’ll continue with your normal payment schedule, in addition to making up the missed payments. Your lender will work with you to figure out the best way to catch up, whether that’s through a payment plan or by making a large lump-sum payment — however, currently, many lenders have eliminated the lump-sum requirement in response to the pandemic.
Should I apply for deferment or forbearance?
Both mortgage deferment and mortgage forbearance allow borrowers to cease making monthly payments temporarily. The difference lies in what happens when the temporary period is over.
In a deferment, your lender adds the amount that’s been deferred to the end of your loan term. That means you don’t need to worry about making extra payments in addition to your regular monthly payments like you would in a forbearance.
Due to the pandemic, Fannie Mae and Freddie Mac have established a payment deferral option that allows borrowers to defer payments until the end of the loan — either when it’s paid off, refinanced or the home is sold — without needing to pay accrued interest or late fees. Once the deferral period ends, borrowers can resume their regular payments, keeping the same interest rate and term.
As for which option you go with, it depends on your financial situation and whether you can afford to make catch-up payments sooner rather than later. If you expect your finances to improve quickly and you can afford the payments, then forbearance may be the best choice. On the other hand, if you don’t mind extending your loan term for up to an additional 12 months to make up payments, and you don’t foresee your situation improving anytime soon, then deferment may be the way to go.
What a forbearance agreement looks like
Forbearance agreements differ between mortgage lenders since they’re based on factors such as the investor requirements of your loan and the type of mortgage you have.
Whoever your lender is, your agreement will outline the terms of the forbearance period, such as:
- The length of the forbearance period
- How the missed payments will be repaid and any late fees you may be responsible for
- The amount of payment required during the forbearance period, if any
- Whether the lender will report the forbearance to the credit agencies
- Whether interest will continue to accrue on the missed payments
Under the CARES Act, forbearance for conventional loans owned by Fannie Mae and Freddie Mac and government-backed FHA, USDA and VA loans includes waived late fees and no late payment reporting to the credit bureaus.
Can forbearance hurt my credit?
You should continue to make your mortgage payments until you receive a written notice that the forbearance agreement is in effect. If not, your lender could report those missed payments to the credit bureaus, which can negatively affect your credit score.
In addition, make sure to check your credit report regularly to ensure your lender doesn’t mistakenly report catch-up payments as late ones. If there is an error, ensure you dispute it as soon as you can.
Remember, however, that your credit shouldn’t be negatively impacted if your forbearance agreement falls under the CARES Act, since your lender won’t report missed payments to the credit bureaus.
How to ask for a mortgage forbearance
To request a mortgage forbearance, contact your lender or whoever services your mortgage payments as soon as possible. Typically, you’d need to provide documentation proving that you’re experiencing financial difficulty. Under the CARES Act, you don’t have to, but you may be required to make a written or oral statement that you’re experiencing hardship.
In any case, you’ll need information such as your most recent mortgage statement, an estimate of your monthly expenses and your current monthly income. It’s best to have documents such as pay stubs, medical bills or a layoff notice handy in case you need to provide proof when you request a forbearance or extend an existing forbearance period.