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Forbearance on mortgages and other loans can provide relief from financial hardship in the form of reduced or suspended payments. But forbearance is temporary, typically lasting no more than 12 months.
So what happens when the relief term, or forbearance period, ends? The answer depends on the agreement you made with your lender and shouldn't come as a surprise if the agreement was clear. Here's an overview of the possibilities.
When Mortgage Forbearance Ends
Mortgage forbearance is a topic many Americans are learning about for the first time, as they seek relief from lenders in the face of coronavirus-related income losses.
For many homeowners, mortgage forbearance is an option provided under the Coronavirus Aid, Relief and Economic Security (CARES) Act. Among its many economic relief provisions, the CARES Act requires lenders and servicers responsible for federally backed mortgages to offer homeowners payment forbearance; these include FHA loans, VA loans, USDA loans and all mortgages owned or securitized by Fannie Mae or Freddie Mac.
Homeowners with mortgages not backed by the federal government may still qualify for COVID-19 mortgage forbearance under voluntary relief programs put in place by lenders. If your loan falls under this category and you're interested in mortgage forbearance, contact your lender to see what options they're offering.
Mortgage forbearance terms vary, but all require you to eventually make up for the payments that were excused during the forbearance period. While the CARES Act makes special stipulations for certain loans (see below), repayment under normal circumstances is typically handled in one of three ways:
- Reinstatement: Under reinstatement, you pay a lump sum covering the total amount by which your payments were reduced during forbearance, plus interest and possible fees, at the end of the forbearance period. Upon reinstatement, you resume making regular loan payments in the same amount you paid before forbearance, on the original payment schedule spelled out in your loan agreement.
- Repayment plan: A repayment plan divides the amount you were excused from paying during the forbearance period into installments and adds them (with interest and possible fees) to your regular monthly mortgage payments. The number of repayment installments is negotiable and can depend in part on your ability to make payments, but it's usually no greater than 12 months. Increasing the number of installments lowers the amount of each payment, but adds to total interest paid over the repayment term.
- Mortgage modification: A mortgage modification permanently restructures your loan to reduce the monthly payment and make it easier for you to keep up with payments. Under a mortgage modification, any amount you were excused from paying during forbearance is added back into the total you owe and factored into the new payment structure. A 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 Mortgage Forbearance Under the CARES Act Ends
Under provisions of the CARES Act, if you get mortgage forbearance on a federally backed loan as part of COVID-19 relief, your loan servicer cannot charge extra interest on your forbearance repayments or require you to repay excused payments in a single lump sum at the end of the forbearance period.
The U.S. Consumer Financial Protection Bureau (CFPB) provides the following details for forbearance repayments under different types of federally backed loans. The CFPB notes that these are options available to lenders, but may not apply to all borrowers. It urges homeowners to consult with their loan servicers for additional details.
Lenders and servicers of mortgages owned or securitized by Fannie Mae or Freddie Mac have the following options for repayment after a forbearance period:
- Give borrowers up to 12 months after forbearance ends to repay past-due payments.
- Extend the mortgage term by the exact number of months in forbearance.
- Add past-due amounts to the loan balance and extend the term of the loan by the number of months necessary to keep monthly payments the same as they were before forbearance.
- Add past-due amounts into the loan balance and extend the loan term to 40 years.
Lenders and servicers of FHA loans have the following repayment options:
- Borrowers may enter into a repayment plan to repay past-due amounts within six months of forbearance ending.
- Mortgage term may be extended to 30 years by adding the past-due amounts to the outstanding balance on the loan.
- Past-due amounts may be paid off at the end of the loan in a lump sum.
Servicers of VA loans can extend any of the following forbearance repayment options to their borrowers:
- Borrowers may enter into a plan to repay the past-due amount within six months of forbearance ending.
- Past-due amounts (including payments abridged during forbearance and any payments missed prior to forbearance) can be added to the loan balance, and the loan term may be extended to 30 years.
- Servicers are to aim to keep monthly payments at no more than 31% of a borrower's gross income, extending the loan term to as much as 30 years as needed to do so, with an option of forbearing principal.
Lenders and servicers administering USDA loans can offer borrowers one of the following options for forbearance repayment:
- Borrowers may enter into a repayment plan to repay past-due amounts within six months.
- Servicers may add past-due amounts into loan balances and extend the term to 30 years to keep payments equal to or lower than the amount they were prior to forbearance.
- Forbearance repayment can be provided in a lump sum after the final loan payment is made.
Lenders and servicers issuing non-federally backed mortgages are not compelled to take action under the CARES Act, but the CFPB and a handful of other agencies have urged them to be flexible in dealing with borrowers beset by the COVID-19 pandemic. The CFPB recommends borrowers check with their lenders and loan servicers about available forbearance plans and repayment options.
No matter what type of mortgage loan you have, if you're concerned that you will be unable to manage your mortgage forbearance repayments, or will be unable to resume regular mortgage payments at the end of the forbearance period, contact your mortgage servicer before the end of your forbearance period to discuss your options. The lender may be able to offer you longer-term help.
When Credit Card Forbearance Ends
If a credit card issuer agrees to give you forbearance on your account (sometimes referred to as deferment), relief may include one or more of the following:
- A reduction in your minimum payment amount
- Permission to skip one or more payments (without incurring a penalty or extra interest charge)
- An increase in your borrowing limit
- A reduction in your interest rate
Credit card forbearance does not stop interest charges from accumulating on your account balances, and those charges can add up quickly. If you have a high balance and are making minimum payments (or none at all), interest can snowball quickly.
If you can't resume making regular payments after your credit card forbearance period ends, the card issuer could reduce your borrowing limit, block you from making new purchases, or force you to accept a plan for settling your balance in fixed installments.
The last option would result in a notation on your credit report indicating the account was "closed at credit grantor's request." But as long as you keep up with the installment payments and pay off the account, there would be no negative effect on your credit score from this arrangement. However, missing an installment payment, like missing a regular credit card payment, would lead to a delinquency being recorded on your credit report, and that could have a significant negative impact on your credit score.
When Student Loan Forbearance Ends
Under the CARES Act, the servicers of most (but not all) federally backed student loans have put loan payments on hold through September 2020. No interest will accrue while loan payments are suspended, and efforts to collect any delinquent payments on those loans have been suspended through December 2020.
Once that relief period ends, borrowers with federally backed student loans will still have access to relief provisions built into their loan agreements. Those take the form of deferment—suspension of payments during which accrued interest payments are subsidized—and forbearance, which typically entails accrual of interest charges.
Borrowers with federally subsidized student loans may qualify for loan deferments on the basis of financial hardship, unemployment, military service or college enrollment.
There are two types of student loan forbearance: general forbearance, similar to the forbearance offered by mortgage and credit card lenders in response to temporary financial difficulty, and mandatory forbearance, which servicers of federally backed student loans must grant under a variety of circumstances, including payments exceeding 20% of your monthly gross income and enrollment in medical internships, AmeriCorps, the Peace Corps or the National Guard.
During forbearance, interest will continue to accrue on your loan. If you do not pay that accrued interest by the time your forbearance period ends, it will be added to your loan balance (or capitalized), resulting in a larger payoff amount.
The Bottom Line
Loan forbearance is a form of temporary relief that can be a real lifesaver in times of financial hardship. While it typically comes at some cost in the form of extra interest charges, the peace of mind it provides can be invaluable. Just be sure you know the terms and what will happen when the forbearance period on your loan ends so you can be prepared for what follows.