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Loan forbearance—a short-term reduction or suspension of payments in response to a borrower's temporary hardship—can preserve household cash flow in times of economic difficulty. It can also have significant impacts on your credit history and credit scores.
Forbearance has long been an option for borrowers seeking relief from financial setbacks—and lenders historically have been fairly choosy about extending it. They typically grant forbearance only after a financial review to gauge the likelihood the borrower can resume regular payments at the end of the forbearance period.
As we'll discuss below, a notable exception to this is issuers of student loans, who are legally required under some circumstances to offer payment forbearance, and even to allow deferment of loan payments, interest-free.
Today, amid upheaval and uncertainty due to the COVID-19 pandemic, vast numbers of individuals are candidates for forbearance and, with encouragement from federal and state agencies, many lenders, including issuers of mortgages, student loans and credit cards, are proactively offering forbearance arrangements to borrowers. In even better news for worried families, some creditors are even offering outright deferment on payments.
Forbearance vs. Deferment
Under a forbearance agreement, the lender agrees to accept reduced payments or no payments at all for up to 12 months. At the end of the forbearance period, the borrower must resume regular payments and repay the amount they were excused from paying during the forbearance period, with interest and possible fees. Repayment can be made as a lump sum, or in up to 12 installments, which are added to regular monthly payments.
In a loan deferment, payments are simply put on hold for a certain number of months; when the deferment period ends, loan payments resume as before, without accruing any additional interest or fees, and no repayment is required.
What Is a Mortgage Forbearance?
Mortgage forbearance is an option many mortgage lenders provide for borrowers facing temporary financial hardships. When the borrower's circumstances threaten to lead to missed mortgage payments, it can help prevent foreclosure—a costly process for borrowers and lenders alike.
When a mortgage borrower seeks forbearance, the lender typically requires proof of financial hardship, evidence that the hardship is temporary, and assurances that the borrower will be able to resume payments and repay all missed payments, plus interest, at the end of the forbearance period. (Payment deferment is not typically an option with mortgage loans.)
Not all borrowers qualify for traditional mortgage forbearance. If you know you are going to miss mortgage payments, look into forbearance—but also consider other possible options for avoiding foreclosure, including selling the home or:
- Refinancing your loan
- Mortgage modification
- Debt management programs
- Debt settlement
- Forfeiting your deed in lieu of foreclosure
All of these options, except selling your home before you miss a mortgage payment, will be recorded in your credit reports and will likely have negative consequences for your credit scores—unless you are requesting forbearance due to the coronavirus crisis. As part of the Coronavirus Aid, Relief and Economic Security (CARES) Act, mortgage accounts in forbearance as a result of COVID-19 cannot be reported negatively to the credit bureaus by lenders.
Debt settlement and forfeiting your deed in lieu of foreclosure could have a serious impact on your credit, so these are only recommended as last resorts before foreclosure.
Can You Get Credit Card Forbearance?
Credit card issuers typically offer forbearance arrangements on a selective basis to borrowers facing temporary hardship. Credit card forbearance options may include:
- Lowering your monthly minimum payment
- Letting you skip one or more monthly payments (and waiving the penalty charge that normally accompanies late or missed payments)
- Increasing your borrowing limit
- Lowering your interest rate
Credit card issuers usually offer forbearance only on a case-by-case basis, and may not offer all relief measures to every customer who qualifies. The specific options they offer you may depend on how long you've been a cardholder, how disciplined you've been about making timely payments, and how high your outstanding balance is. They also do not offer it automatically: If you want forbearance on one or more of your credit card accounts, you need to contact your credit card issuers and request it.
Keep in mind that credit card forbearance does not halt the interest charges on your account and that, even if you qualify for a rate reduction, interest charges on a typical credit card account accumulate quickly. That's especially true if you have a high balance, and truer still if you're using an increased borrowing limit to add to that balance.
Also be aware that if you have a spotty payment history, or if you fail to resume payments after forbearance measures have been granted, your card issuer could lower your borrowing limit, freeze your account and even impose a repayment plan that calls for settling your balance in fixed monthly installments, after which the lender will close your account.
What Does Forbearance Mean for Student Loans?
Unlike mortgages lenders, which traditionally offer forbearance on a case-by-case basis, issuers of federally backed student loans have forbearance provisions built into their loan agreements.
There are two types of student loan forbearance:
- General forbearance: You may qualify for general forbearance at the discretion of your lender or loan servicer on the basis of financial difficulty, overwhelming medical bills, unemployment or significant reductions in income. If you qualify, you'll be given reduced or suspended payments for up to 12 months, after which you may request another forbearance. Some programs limit total length of forbearance over the lifetime of the loan to three years.
- Mandatory forbearance: Servicers of federally backed student loans must accept your forbearance request if:
- Your loan payments exceed 20% of your monthly gross income.
- You are enrolled in a medical or dental internship or residency.
- You serve in AmeriCorps or similar volunteer-based programs.
- You are a teacher who qualifies for student loan forgiveness.
- You serve in the National Guard or are enrolled in the Department of Defense's loan repayment program.
Borrowers with federally subsidized student loans may also qualify for loan deferments on the basis of financial hardship, unemployment, military service or college enrollment. Deferment can be more difficult to get than forbearance, but the option is worth investigating, because it can mean considerable savings in interest compared with a forbearance agreement.
How Forbearance Impacts Your Credit
Without a forbearance or deferral agreement, skipping or making partial loan payments is considered delinquency. Delinquencies are recorded on your credit report and can have a major negative impact on your credit score.
How suspended or reduced payments are handled under forbearance agreements differs by loan type. Their consequences for mortgages and student loans have different potential impacts on your credit.
Mortgage Forbearance and Credit
With the exception of special circumstances during emergencies such as the COVID-19 crisis (more on that below), mortgage payments missed or underpaid as part of a deferral or forbearance arrangement are technically delinquencies, since they don't conform to the repayment terms spelled out in your original loan agreement. Mortgage lenders have the right to report them as such to the credit bureaus, but they're not required to do so. Ask your lender about their policy before accepting a forbearance agreement so you know what to expect.
Under mortgage forbearance agreements, lenders agree to refrain from pursuing foreclosure proceedings, which can do lasting damage to your credit over and above the harm caused by missed payments. A foreclosure stays on your credit report for seven years from the date of the first delinquency that led to foreclosure, so if forbearance allows you to avoid foreclosure, taking a near-term credit score hit might be a worthwhile trade-off.
Credit Card Forbearance and Credit
If your credit card lender grants your request for forbearance and you keep up with payments as agreed (resuming payments after skipping the number your lender agreed to and/or covering your reduced minimum payment each month, for instance), it's possible, but unlikely you'll see any negative entries on your credit report.
Credit card forbearance can hurt your credit score indirectly, however, by increasing the balance and utilization rate on your card.
If you fail to resume regular payments after your card issuer extends forbearance, the lender's imposition of a repayment plan and eventual closing of your account will be noted in your credit report, and those events are likely to hurt your credit score.
Student Loan Forbearance and Credit
Student loan forbearance, as long as it is arranged in accordance with the original loan agreement, means late payments are not reported during the forbearance period. Your loan will continue to appear on your credit reports, and the account will remain listed in good standing.
COVID-19 Forbearance and Loan Relief Programs
If you're facing financial hardship related to the COVID-19 pandemic, it's worth investigating relief programs your creditors may have available. Many lenders' homepages have been updated with information on how to seek payment forbearance or deferment. Many of the programs are also overwhelmed with requests, so be prepared to be patient and persistent. These programs are not activated automatically, so you must be proactive and contact your lender to apply.
Federal relief provided for in the CARES Act calls for lenders to be flexible with mortgage borrowers, automatically granting payment forbearance of up to 90 days for all who request it and not reporting negatively to the credit bureaus. It also requires lenders to work with borrowers after that period to work out repayment schedules or modify mortgage loans as needed, with the goal of keeping them in their homes. Current federal guidelines also suspend all foreclosure actions until at least June 30, 2021.
Other federal agencies have also announced continuing pandemic relief programs, including the following:
- If your mortgage is one of the 95% of American single-family home loans backed by Fannie Mae or Freddie Mac, you may qualify for mortgage forbearance up to 18 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).
- Borrowers with FHA loans and USDA loans will continue to qualify for financial assistance. If your mortgage is one of these types of loans, contact your lender directly to learn about relief options.
- The U.S Department of Veterans Affairs (VA) is directing lenders who issue VA Loans to be flexible with borrowers facing COVID-19-related financial hardships. If you have a VA loan, you should contact your lender directly to learn about forbearance options; also refer to the VA's COVID-19 information page to find out more.
- In connection with the COVID-19 pandemic, payments on all federally backed student loans have been suspended until Sept. 30, 2021. Borrowers should monitor the Department of Education website for updates and information on any other relief programs that may be in development. Enrolled students should contact their schools to learn about additional relief programs or tuition refunds that may be forthcoming as a result of the pandemic.
The Bottom Line
Loan forbearance can be a helpful tactic for protecting your credit when you cannot make your monthly payments. Because forbearance is a built-in option for many student loans, you shouldn't hesitate to use it when needed.