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Mortgage forbearance is a short-term suspension or reduction of monthly mortgage payments granted by a lender to help a borrower through temporary financial hardship. Lenders aren't required to grant your request for forbearance, and there are some things you can do before asking that may help you make your case to your lender.
How Does Mortgage Forbearance Work?
To receive mortgage forbearance, you must ask for it. Lenders offer forbearance at their discretion, with the expectation that regular payments will resume within a short time (typically no more than 12 months) and that payments put on hold in the forbearance period will be repaid with interest.
When forbearance ends, lenders typically expect you to make repayment in one of the following ways:
- A lump-sum payment that covers the portion of your regular payments you didn't make during the forbearance period.
- Repayment in installments, which are added to your standard monthly mortgage payment, for a period of up to 12 months.
- Deferral of payments, which are added on to the end of your payment term and can result in significant additional interest charges.
- Mortgage modification, which is a recasting of your loan terms that permanently alters your interest rate and/or the length of your payment term to make your monthly payments more affordable.
Except under extraordinary circumstances such as the COVID-19 pandemic, during which servicers of federally backed mortgages were ordered to provide forbearance to all borrowers who sought it, forbearance is a courtesy. Lenders are not obliged to offer it and typically limit it to borrowers with good credit who can show that their financial difficulties will be short-lived.
Examples of short-term hardships forbearance might address include:
- Property damage from a storm or other natural disaster
- Temporary income loss due to illness or disability
- Death of a co-borrower
- Divorce or marital separation
- Physical relocation (for a verifiable employment opportunity, for example)
- Short-term increase in household expenses (as for a medical issue)
Payment relief available through mortgage forbearance include:
- Reduction in your monthly payment amount
- Temporary suspension of monthly payments
When you ask for mortgage forbearance, you should plan on explaining your hardship and why you expect it to be temporary. You should also offer evidence that you'll have the means to make repayments when forbearance ends. This could include documentation showing your income will increase (due to new employment, an insurance payout, inheritance or similar) or that a short-term increase in expenses will end (upon conclusion of a medical leave or completion of a home repair).
Pros and Cons of Mortgage Forbearance
Thereare distinct benefits and disadvantages to mortgage forbearance:
Pros
- Avoid selling your house: Mortgage forbearance can afford you an opportunity to get through a short-term reduction in income or increase in expenses without having to sell your house or fall behind on mortgage payments.
- Reduce stress: Reduced or suspended mortgage payments during a time of temporary financial crisis can reduce the stress of coping with job loss, personal loss or disaster recovery.
- Preserve your credit score: If your lender agrees not to report your loan status as "not paid as agreed" during your forbearance period, there will be no negative impact on your credit scores. (More on this below.)
Cons
- Hard to get: If you have less-than-ideal credit (or a spotty history of timely mortgage payments, which can be a cause of reduced credit scores), your lender could deny your request for mortgage forbearance. In that case, you'll either have to find resources needed to keep up with your mortgage payments, sell the house under less than optimal short-sale conditions or face foreclosure.
- Increased payments later: The transition from the forbearance period, when monthly payments are reduced or suspended, to the repayment phase, when you must make monthly payments in an amount greater than you normally do (or make a lump-sum repayment) can be challenging to your household budget.
- Foreclosure: If for any reason you are unable to make scheduled reduced payments during the forbearance period or repay suspended or partial payments according to terms of your forbearance agreement, the lender can foreclose on your home.
Is Mortgage Forbearance Bad for Your Credit?
That depends. Even though it is given with the lender's permission, mortgage forbearance technically deviates from the terms of your mortgage contract. The lender can report your loan as "not paid as agreed" to the national credit bureaus (Experian, TransUnion and Equifax), which would result in a negative entry on your credit report.
Lenders do not have to report forbearance to the credit bureaus, however, and some do not. Before entering into a forbearance agreement, it's wise to know your lender's policy on this—and it's OK to ask them not to report a change in payment status to the credit bureaus.
Is Mortgage Forbearance a Good Idea?
If you are experiencing financial challenges, such as loss of income or increased expenses, and you are confident they will be temporary, mortgage forbearance can be a great way to ease the pressure on your budget without putting your home at risk. If your loan servicer agrees to not to report a change in payment status to the credit bureaus, it can even allow you to keep your credit intact.
If, however, you cannot realistically commit to resuming regular mortgage payments within 12 to 18 months or less—and at least starting to repay all of what you would have paid during the forbearance period at that time—mortgage forbearance probably isn't a good option. If that's the case, or if your mortgage lender denies your forbearance request for any reason, consider consulting a government-approved housing counselor to help sort out your best options.
How to Qualify for Mortgage Forbearance
The only way to know whether you'll qualify for mortgage forbearance is to ask your lender or loan servicer.
Just as mortgage lenders set their own criteria for loan approval, each has its own standards for deciding to whom it will extend mortgage forbearance. Factors could include your credit history, credit scores and evidence you can provide to show that your hardship will be temporary and that you'll have the means to make repayment after the forbearance period ends.
FAQs About Mortgage Forbearance
The length of a forbearance period may be negotiated with some lenders, but the majority of mortgages issued in the U.S. conform with requirements for sale to Fannie Mae and Freddie Mac, the federally chartered corporations that purchase most of the nation's single-family mortgages issued in the U.S. Fannie Mae stipulates that forbearance agreements should last no more than six months, and gives borrowers the option to seek one or more extensions at the end of that period. Freddie Mac allows for up to 12 months of mortgage forbearance.
If you seek but are unable to qualify for mortgage forbearance, your options include the following:
- Mortgage modification: Under terms of mortgage modification, your lender agrees to a permanent change in the terms of your loan, with the goal of making your payments more affordable. Typically, this entails reducing your interest rate, extending the length of your payment term (adding additional payments and increasing total interest charges) or both.
- Chapter 13 bankruptcy: If you have income and your financial difficulties are related to debts other than your mortgage, filing Chapter 13 bankruptcy could allow you to keep your home. In a Chapter 13 proceeding, a federal court establishes a plan for you to make full or partial repayment of your debts, and such a plan could permit you to continue to make mortgage payments. This option will have a significant negative impact on your credit, so consider all your options before pursuing it.
- Short sale: In a short sale, you sell the house and, if there are any net proceeds after you pay off what's owed on your mortgage, you may be able to put those funds toward another house or other living arrangements. This option requires your lender's permission.
- Deed in lieu of foreclosure: With a deed in lieu of foreclosure, you and your lender negotiate an agreement that lets you walk away from your mortgage (and your house) without going through the legal process and expense of a foreclosure. In some cases, you may even be able to negotiate a cash payment from the lender that you can use to find a new living situation.
- Foreclosure: If all else fails, you may have no recourse but foreclosure, in which you forfeit your house to the lender.
Mortgage forbearance does not normally result in interest surcharges or penalties, but interest charges continue to accrue against the full balance you owe during the forbearance period. Since your balance at the end of forbearance will be greater than it would have been if you'd maintained your regular payment schedule, you'll end up paying more interest on your loan than you would have if you never accepted forbearance. The quicker you make up any payments that were reduced or suspended during the forbearance period, the less you'll pay in additional interest.
The Bottom Line
If you are experiencing a temporary financial hardship and confident you'll be able to resume regular mortgage payments in a year or less, mortgage forbearance could be a great option for getting you through the crisis. As you navigate your hardship, it's a good idea to keep an eye on your credit. If your lender agreed not to report payments as late or missed, checking your credit report can ensure they keep their promise.