What is mortgage forbearance?

If you can’t make your mortgage payments because you lost your income or had a medical emergency, mortgage forbearance can give you some time to get back on your feet.

Forbearance is a form of mortgage relief that can help you stay on track with your mortgage so you don’t default on your loan and risk your lender’s foreclosing on your home. When your loan is in forbearance, you can make reduced payments or no payments for a period of time.

Forbearance alone usually doesn’t hurt your credit, although it’s best to check your credit reports for possible mistakes. Whether forbearance is right for you depends on your circumstances. You may want to explore alternatives such as loan modification and refinancing to help make your mortgage payments more affordable.

• How mortgage loan forbearance works
• Is mortgage forbearance a good idea?
• Does forbearance hurt credit?
• What are my options other than mortgage forbearance?

How mortgage loan forbearance works

Mortgage forbearance gives homeowners a temporary break from their full mortgage payments while they recover from a personal hardship like losing a job or being in the hospital. The forbearance agreement might allow you to make lower payments than usual or to stop making payments for a set number of months.

There are different kinds of forbearance arrangements. The choices you have depend on whether your loan is backed by a private lender, by Fannie Mae or Freddie Mac, or by a government agency like the Federal Housing Administration or the Department of Veterans Affairs.

For example, people who have mortgages backed by Fannie Mae, Freddie Mac or a government agency — and who have been affected by COVID-19 — are eligible under the CARES Act for forbearance of up to 180 days, which may be extended at the end of the forbearance period.

The length of a forbearance period varies but may be in the range of three months to a year. During the forbearance period, you don’t have to pay interest. However, interest will continue to accumulate on the principal of the loan.

While forbearance allows a borrower to postpone making payments, it doesn’t lower the amount the person owes. Once the forbearance is over, the borrower has to make up the payments that were delayed.

Depending on the type of forbearance, you might have to make one large payment immediately after the forbearance period ends. Alternatively, you might be given a repayment period during which you need to make up the amount that was delayed, on top of the usual mortgage payments.

Finally, you also might have the option to extend the mortgage’s term or to take out a new loan for the delayed payments. If you extend the mortgage, then you make up the delayed payments after the loan would have ended. So, if the mortgage was in forbearance for six months, then after the conclusion of the original term, you’d make payments for an additional six months.

Taking out a new loan also may allow you to postpone paying back the missed amount until the end of the loan. With this option, you make up the delayed payments in a lump sum payment after the loan ends.

Is mortgage forbearance a good idea?

Whether mortgage forbearance can help depends on your personal situation. It may be a good option if you aren’t able to make your mortgage payments for a time but you expect the financial hardship to be over within several months.

For example, if you were laid off from your job but think you can probably find a new job with a comparable salary quickly, forbearance could give you relief from your mortgage payments while you look for employment.

On the other hand, if a crisis has permanently changed your financial circumstances for the worse, forbearance may not be a good option because you would need to resume your regular payments in the future.

Let’s say you need to care for a relative and have to cut your work hours in half, so that you have less income and can no longer afford your mortgage. If this situation is your new normal and you don’t expect your income to go back up soon, forbearance may not make sense since it would simply postpone your unaffordable payments for a limited time.

Does forbearance hurt credit?

When your mortgage is in forbearance, the payments you’re delaying shouldn’t be reported as late to the credit bureaus. But your lender might report that you’re in forbearance, which by itself usually doesn’t lower your credit scores.

Still, you should check your credit reports regularly to make sure no errors appear on it. If you see something inaccurate — like a reported missed payment after your forbearance started — you’ll want to contact the credit bureaus to get it corrected.

Pay close attention to your mortgage statements when your loan is in forbearance because you’ll need to start making payments again once the forbearance is over. If you lose track of your loan’s status and don’t make payments on time, your credit could suffer.

What are my options other than mortgage forbearance?

Forbearance isn’t the only option if you’re having trouble paying your mortgage. Here are some others to consider.

Loan modification

Unlike forbearance, which involves a short-term change to your payment terms, loan modification alters your mortgage for the rest of the life of the loan. If your mortgage servicer agrees to loan modification, it may allow you to pay a lower interest rate or to have more time to pay off your mortgage. And if the mortgage is for the house you live in most of the time, it might be possible to get part of your debt canceled so that you have a smaller principal amount to pay back.

A mortgage servicer will likely want to see that your difficulty making payments is due to a permanent hardship and that you have sincerely tried to meet your obligation before it will agree to change your mortgage terms.

Refinancing

You might be able to refinance your mortgage to get better payment terms. Refinancing means taking out a new loan and using it to pay off your current mortgage. If your credit scores are better now than when you took out your mortgage or if lower interest rates are available because of changing conditions in the economy, you might find a new loan with a better rate. That could give you lower monthly payments that are easier to manage.

Another way refinancing can reduce your monthly payments is if your new loan has a longer term, so that you make smaller payments over a longer period of time. Keep in mind, though, that a longer loan term means you’re paying interest for longer, too. Your lower monthly payments could come with a higher total interest price tag over the life of the loan.

Draw on savings

If you have money in an emergency fund, you may want to use it if you can’t pay your mortgage. You could also consider borrowing from your 401(k) if your plan allows you to do so.

If you are facing foreclosure, you may qualify for a hardship distribution to permanently withdraw money from your 401(k) if it’s permitted by your plan.

Sell your home

If you can sell your home for a price that covers the amount you still owe on your loan, then a sale may offer a path out of a mortgage you can no longer afford.

But what if selling your home will bring in less money than the amount you owe? Do you have to make up the difference? In most states, you have to negotiate with the lender for forgiveness of the difference — only a couple of states flat-out require forgiveness. Either way, this is known as a “short sale,” and it’s an action that typically can prevent you from taking out a new mortgage for at least two years.

While a short sale will probably hurt your credit, it may not have as dire an effect as a foreclosure. Still, you should generally only consider a short sale if you’ve exhausted other options.

Bankruptcy

Chapter 13 bankruptcy can allow people who have income to avoid foreclosure. The process usually results in a payment plan, which allows the borrower to repay their debts over the course of a few years.

But a Chapter 13 bankruptcy will stay on your credit report for seven years, likely reducing your credit scores significantly during that time. Lenders probably will be reluctant to lend to you with a bankruptcy on your record. And employers may find out about your bankruptcy when you apply for a job.

Because of these consequences, filing for bankruptcy usually doesn’t make sense unless you’ve ruled out all other alternatives.

What’s next?

If you’re not sure whether you would benefit from forbearance, you may want to speak with a HUD-approved housing counselor. The Department of Housing and Urban Development trains counselors to advise people who are struggling to pay their mortgages. Talking to a HUD-approved housing counselor is free, and you can find a counselor near you on the Consumer Financial Protection Bureau website.

If you decide to seek forbearance, you’ll need to call your mortgage servicer to ask what relief it can give you. Be prepared to provide proof of your income, savings and other debts. You should get a written explanation of any forbearance plan you’re entering into, stating how long the forbearance will last and how you’ll make up the payments you’ve missed once the forbearance is over.