What Is Mortgage Forbearance And How Does It Work?

Mortgage forbearance is a relief program that allows homeowners to pause or reduce their mortgage payments for a few months or longer, depending on your lender, circumstances or both. When the forbearance period ends, borrowers have several options for repaying what they owe, including tacking the missed payments and principal to the back of the loan and resuming regular payments without any increases or penalties.

What Is Mortgage Forbearance?

Designed for borrowers who are facing financial hardship, mortgage forbearance is one tool lenders and mortgage servicers can use to help homeowners ease their financial burden in order to avoid defaulting on their loan.

There are many reasons why homeowners would need forbearance, from unemployment to a change in marital status. Common circumstances in which forbearance might be necessary include:

  • Homes damaged or destroyed in natural disasters
  • Loss of income
  • Medical issues
  • The death or illness of a co-borrower
  • Separation or divorce
  • Job relocation
  • Increased expenses

Mortgage Forbearance Options

There is no one type of forbearance plan. The length and terms of a mortgage forbearance differ by the type of loan you have, your servicer or lender and your circumstances. The two common types of forbearance plans include:

  • Pausing payments. A pause in payments means that you can stop paying your monthly mortgage payments for a specified period. This period can be a few months or longer, depending on your circumstances. During this period interest will usually accrue on missed payments until they’re repaid.
  • Reduced mortgage payments. A reduction in mortgage payments means that your lender cuts how much you owe each month by a certain percentage that’s affordable to you for a set amount of time. For example, if your monthly payments are $2,000, your lender might reduce it to $1,000 for six months.

As forbearance plans differ by individual lenders and loan types, the same applies to repaying your forbearance. There’s no one-size-fits-all option, so it’s important to talk to your lender about what’s possible for your situation. Common repayment options include:

  • Lump-sum payment. Once the forbearance period ends, you would owe the total sum (principal and accrued interest) in one payment. If your monthly payments were $3,000 and you paused them for six months, you would owe $18,000 at the end of your forbearance. This could be challenging for people facing financial hardships. However, if you’re expecting a windfall at the end of your forbearance (perhaps through investment income or an employment bonus), a lump-sum payment might be doable.
  • Extended terms. A second common repayment option is to extend the term of your loan. If you have 15 years left on your mortgage and you pause your payments for three months, you would add the extra months to the end of your term, so you would have 15 years and three months left to pay off your mortgage. In this scenario, you would simply resume normal monthly payments when the forbearance period ends.
  • Payments spread over time. The third common option is to divide how much you owe by a certain amount of time and make monthly payments until it’s paid off. If you owe $18,000 in mortgage payments, you can break up that large amount by paying it over 12 months. In this scenario, you would pay an extra $1,500 per month for 12 months on top of your regular monthly mortgage payment.

If you think a mortgage forbearance is right for you, research your options. A housing counselor should help you understand what your rights are and the relief options available to you. The Consumer Financial Protection Bureau website can help you locate a housing counselor.

Contact your lender or servicer, as well. They can give you information about programs you might be eligible for, as well as their specific rules and qualifications.

There are also national, state and local programs designed to help homeowners in crisis, such as the Hardest Hit Fund, which was established after the 2007 housing crisis and operates in 18 states and the District of Columbia. In the case of a natural disaster, some lenders might require that you apply for a forbearance within a certain period of time.

Traditionally, lenders will conduct a thorough review of the borrower’s finances before they approve an application to make sure borrowers can resume making payments when the forbearance period ends.

Forbearance Rules Under the CARES Act

In recent months, mortgage forbearance has been in the spotlight because of the coronavirus pandemic, which sent the U.S. economy into a tailspin and drove up unemployment.

Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the $2.2 trillion pandemic relief bill, homeowners with government-backed mortgages are entitled to mortgage forbearance.

Government-backed mortgages are home loans guaranteed by the government—including FHA, VA and USDA loans—which reduces the risk for private lenders to loan money. Government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, also fall under this category because GSEs buy mortgages from private lenders using federal funds.

Government-backed mortgages make up about 70% of home loans in the U.S. Homeowners with the roughly 14.5 million U.S. mortgages that are privately owned should talk with their lenders if they’re unable to keep up with their mortgage payments. You can check to see if your home is federally backed by using the Fannie Mae or Freddie Mac lookup tools.

CARES Act forbearance rules are specific to eligible mortgages, meaning they may be different than forbearance plans not covered by the CARES Act. The initial forbearance period under the CARES Act is 180 days from the time of approval, with the option to extend it for another 180 days.

Borrowers are not required to prove hardship in order to qualify for forbearance. They simply must call their servicer or lender and state that they were affected by the coronavirus and would like to enter into forbearance. Interest will accrue as it does during a traditional forbearance, but you will not pay penalties or fees.

In addition, mortgage forbearance is not reported to credit bureaus under the CARES Act; that rule does not apply to traditional loan forbearance.

How To Qualify For Mortgage Forbearance

The application process and qualification requirements vary by lender. Be sure to have basic financial information ready when you call your servicer or lender. This information includes mortgage statements (including any secondary mortgages, like home equity loans), income information and details about your other debt.

In most cases, borrowers will have to submit a forbearance application online, by mail or in person. The information you need to provide on the application is different for each lender. If your lender is Wells Fargo, for example, you are required to fill out a financial worksheet, which requires a detailed description of your income, debt and property; a hardship affidavit and monthly household expenses.

On the other hand, Freddie Mac forbearance applications do not require a hardship affidavit. Borrowers need only to verbally state that they’re facing hardship in order to qualify.

Will Mortgage Forbearance Affect My Credit?

Because mortgage forbearances deviate from the agreed-upon repayment plan, lenders have the right to report them to the credit bureaus, which would have a negative impact on your credit score. However, it’s better to get a forbearance than to miss payments, default on your mortgage or go into foreclosure because those will hurt your credit score more. A forbearance shows that you are working with your lender to make sure you avoid those negative consequences.

If your mortgage is not covered under the coronavirus relief bill, then you should talk to your lender about the consequences of getting a mortgage forbearance, including whether they will report it to the credit bureaus.

What Happens If I Don’t Qualify For Forbearance?

If you don’t qualify for mortgage forbearance, there are alternatives that can reduce the cost of your loan. Mortgage refinancing is one such option that could shave hundreds off your monthly mortgage payment.

Mortgage rates are at historic lows and millions of homeowners are eligible to refinance. To determine if you’re among those who can save money by locking in a lower rate, compare your current interest rate with what the average rate is. If you have a credit score of 720 or above, the odds are in your favor to get the lowest rates out there.

In addition to lowering your interest rate, refinancing can also extend the terms of your loan so that you can lower monthly payments by making the loan payback period longer. In the end, you’ll likely pay more in interest; however, it can help make your payments more affordable. Of course, when your budget allows, you can always pay more than your minimum required payment toward your principal to cut down on the total interest paid.

Keep in mind that refinancing costs money, so you’ll want to use a refinancing calculator to make sure you’re saving more than you’re spending. Refinancing can cost between 3% to 6% of your outstanding balance, depending on where you live, how much you owe and the value of your home. If you still owe $200,000 in principal, refinancing fees can be between $6,000 to $12,000.

Borrowers also can apply for a loan modification that could either temporarily or permanently change the terms or interest rate of your loan. The difference between a loan modification and a refinance is that most lenders do not charge for loan modifications. There is a federal loan modification program called the Home Affordable Modification Program (HAMP) and many state-level programs as well.

Finally, it’s better to sell than to go into default or face foreclosure. As we’re in a seller’s market, there’s a good chance you’ll be able to recoup what you paid and possibly turn a profit on the sale.

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