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As America faces economic and social challenges with the COVID-19 pandemic, many homeowners are grappling with income reductions and anxiety about keeping up with mortgage payments. One option for relieving this worry is to seek a mortgage forbearance.
What Is Mortgage Forbearance?
Mortgage forbearance is a temporary change in payment terms negotiated with your mortgage lender. Depending on the terms of the forbearance agreement, your monthly payments may be reduced or even suspended altogether for a period of time, typically no more than 12 months.
Mortgage forbearance doesn't permanently alter your mortgage, and its terms provide for eventual repayment of the funds you're excused from paying during the forbearance period. Repayment is typically handled in one of three ways:
- Reinstatement, in which you pay a lump sum at the end of the forbearance period, covering the full amount by which your payments were reduced plus interest and possible fees, before resuming your original payment terms.
- A repayment plan, which divides the total amount you were excused from paying (plus interest and possible fees) into installments and adds them to your regular monthly mortgage payments. The number of repayment installments is negotiable and will depend in part on your ability to make payments. As with any loan, however, stretching out the number of installments reduces the amount of each installment, but adds to the total amount of interest you'll pay.
- Mortgage modification, which restructures the terms of your loan permanently to reduce your monthly payments and make it easier for you to keep your account current. In a modification, any amount you were excused from paying during a forbearance period is added back into the total you owe and factored into the new payment structure. Mortgage modification can extend the repayment period on your mortgage by a number of months and add significantly to the total amount you'll pay over the remainder of the loan.
When your lender structures a forbearance agreement for you, it also agrees not to foreclose on your home during the forbearance period, as it could if you made incomplete payments without a forbearance agreement.
How Do I Request Mortgage Forbearance?
To find out whether forbearance is an option for you, reach out to your mortgage lender, using the contact phone number on your payment ticket book or payment website, explain your situation and ask about forbearance options.
It's not uncommon for forbearance discussions to begin after a borrower has already missed one or more mortgage payments. But missed payments hurt your credit score more than any other factor, so it's in your interest to start forbearance discussions before you miss any payments, if possible.
If your financial hardship is related to a natural disaster, fire or other catastrophe, it's important to contact your lender as soon as possible; the lender may have a time-limit requirement for notifications on event-specific forbearance requests.
Who Can Get a Mortgage Forbearance?
With the exception of emergency measures discussed below, mortgage forbearance is not a legal right. Lenders grant forbearance at their discretion. Before doing so, they will expect you to provide evidence that you'll be able to hold up your end of the deal. The specifics each lender requires may vary, but they'll likely seek much of the same information they required when considering your original mortgage application, such as:
- Proof of income (pay stubs, tax returns and so on)
- Monthly expenses, including all debt payments (for purposes of calculating your debt-to-income ratio)
- A list of any assets (savings accounts, investments) you could tap to cover your expenses
Your lender may refer to your credit score when considering your request for mortgage forbearance. As a creditor with whom you have an ongoing relationship, your mortgage issuer is legally authorized to monitor your credit score as a matter of course. So in this case, a formal credit check (and accompanying hard inquiry, which can temporarily lower your credit score) may not be necessary. A higher credit score will likely be taken as a sign of good debt management skills, and typically works in favor of a forbearance request.
Because mortgage forbearance is designed to provide temporary payment relief, the lender will also want an explanation of your current hardship and when you expect it to end.
It will help your case considerably if you can point to a firm milestone several weeks or months ahead that will enable you to resume your regular payments (and repay your excused payments): Documenting a forthcoming tax refund, resumption of seasonal work, disposition of an inheritance, sale of a property or any other event that can be expected to improve your cash flow will work in your favor.
If your hardship is more open-ended, be straightforward with your lender about when you can reasonably expect to resume regular payments. If it's unrealistic to expect to be back on track with regular payments within 12 months, consider seeking a permanent mortgage modification instead of a forbearance.
Forbearance and repayment are typically less costly over time than mortgage modification, but if a modification becomes necessary to structure your repayments at the end of your forbearance period, you could pay more in the long run than if you'd skipped forbearance and sought a modification to begin with.
How Does Mortgage Forbearance Affect Your Credit?
Under normal circumstances, payments that are skipped or only partially paid during a mortgage forbearance period technically violate the original terms of your mortgage loan agreement, so even though your lender agrees to the forbearance plan, they may report your payments as delinquent to the national credit bureaus. They are not obligated to report the payments as delinquent, however, and not all lenders do. If they do, payments marked as delinquent will appear on your credit report, and your credit scores will likely suffer as a result.
However, the Coronavirus Aid, Relief and Economic Security (CARES) Act offers relief to borrowers who are seeking forbearance due to the coronavirus crisis but are worried about the impact to their credit: Mortgage accounts in forbearance as a result of COVID-19 cannot be reported negatively to the credit bureaus by lenders.
Typically, lenders may or may not report your account as being in forbearance during the forbearance period. If they do report it, a note will appear on your credit report indicating as much, and some credit scoring models may also dock your credit score during the forbearance period and for some period of time afterward. For those requesting forbearance due to the coronavirus, however, the three credit bureaus (Experian, TransUnion and Equifax) have enacted a crisis response plan that enables lenders to report accounts as in forbearance as a result of a natural or declared disaster, which also protects borrowers from negative consequences to their credit.
Avoiding foreclosure—in addition to preventing the upheaval it can cause in your life—will also help keep your credit in good standing. Foreclosures have a negative impact on your credit.
Special Mortgage Considerations for COVID-19
If you're dealing with income loss or other hardship related to the COVID-19 pandemic and your mortgage is one of the 95% of American single-family home loans backed by Fannie Mae or Freddie Mac, special emergency rules apply. You can receive forbearance of your mortgage payments for up to 12 months, after which your lender must work with you in an effort to come up with a manageable repayment plan (including possible modification of your original loan agreement). Consult your lender about this option and ask about any other COVID-19 dispensations they may have, or that may be mandated in rapidly evolving state and federal laws. Keep in mind that this option does not occur automatically: You must be proactive and contact your lender to apply for assistance.
If you're dealing with a temporary financial hardship, mortgage forbearance can lift a major source of stress and buy you precious time to get back on your feet.