In times of economic hardship, like the present economic events caused by the COVID-19 pandemic, many homeowners struggle to meet their mortgage payments. Employers end up cutting back work hours, causing financial circumstances to become very unpredictable.
Whether you are facing financial instability because of the pandemic or unrelated life events, there are ways to work with your lender and save your home from foreclosure. One of the most accessible short-term solutions is forbearance.
What Is Mortgage Forbearance?
Mortgage forbearance is an agreement between a homeowner and their lender that allows the homeowner to suspend or lower their monthly payment amounts for a set period of time. If you are in the process of finding new work or you are temporarily making less money per month than before, forbearance can give you a temporary break from your regular monthly mortgage payments while you get back on your feet.
How Does Mortgage Forbearance Work?
Each lender treats mortgage forbearance a little differently. It’s important to note that forbearance doesn’t permanently lower your mortgage payments and you will still owe amount of money that you don’t pay during the forbearance period to your lender.
Qualifying For Forbearance
Whether or not you qualify for forbearance depends on your lender and your loan type. For example, government-backed loans are treated differently than private loans. No matter your situation, clarity and initiative are key.
Set up a meeting with your lender as soon as you can so that you can settle on a plan before you miss any payments and subsequently damage your credit. Providing proof of the events that led to financial hardship, like your bills or proof of your loss of income, will give them information they need to understand and reasses your situation.
Repayment Options After Forbearance
The payment plan for your loan after forbearance is up to the entity that actually owns your loan, which in almost every case is different from your lender. For example, Fannie Mae and Freddie Mac both offer standardized repayment plans. Currently, they each allow up to twelve months of forbearance under the CARES Act, which we’ll cover momentarily.
The payment plan and repayment options for privately-backed mortgage loans will vary depending on which entity owns your loan. Contacting your lender to find out who owns your mortgage loan will help you better understand your repayment options.
Mortgage Forbearance COVID-19
Since so many homeowners have faced financial hardship due to COVID-19, the federal government passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act applies to any loan owned by the government entities like Fannie Mae and Freddie Mac.
The CARES Act has made it possible for homeowners to use forbearance plans to pause or reduce their mortgage payments if they are struggling to meet their mortgage due to the economic impact of COVID-19. Home loans backed or insured by Fannie Mae, Freddie Mac, HUD, the VA, or the USDA are covered under the CARES Act during the COVID-19 pandemic.
Repayment Options For Federally-backed Loans
Homeowners with federally-backed loans covered by the CARES Act can repay their mortgage after forbearance in one of many ways. One option is to submit a lump sum payment that covers the missed amount in full at the end of forbearance.
However, this often isn’t always feasible option for those struggling financially. That’s why options like a short-term repayment plan, where you pay an additional payment each month along with your mortgage, or an extended loan modification, which extends your loan term and adds the missed payments to the end of your loan, exist.
Borrowers who can’t afford their mortgage at its current interest rate and monthly payment value may be eligible for a flex modification option. This is available on a case-by-case basis and it will change your loan terms in a way that works for both you and the lender.
Repayment Options For Privately-owned Loans
Private lenders offer similar options to the ones listed above, but their repayment plans vary depending on the bank or institution. Contact your lender to get more information about who owns the loan and the available forbearance options.
Can Forbearances Or Deferments Hurt Your Credit?
Mortgage forbearances or deferments will not hurt your credit. However, it’s crucial to arrange an agreement with your lender as soon as possible. Mortgage payments that go unpaid for more than 30 days without an explanation are typically reported to credit bureaus.
At that point, your missed payments will hurt your score. The sooner you talk to your lender, the better your chances are of finding a viable solution before you start missing your payments.
Mortgage Forbearance vs. Loan Modifications
To understand whether or not you should look into mortgage forbearance, it’s important to compare it with a loan modification. Forbearance is a temporary fix that only suspends your payments for a set amount of time. Plus, the missed payments are still due to the lender after the forbearance period is over.
A loan modification is often an option for those who are already in default on their loans because they have missed payments. Homeowners are eligible for loan modifications on a case-by-case basis. With a loan modification, the terms of their loans will be changed in a way that works better for their financial situations. Typically, this extends the length of the loan but even so, it gives them more time to pay off their loan in smaller doses.
Forbearance Options For Homeowners
Mortgage forbearance can help a homeowner during times of financial stress or instability by suspending or reducing monthly payments in a way that won’t negatively affect credit score or lead to foreclosure. Homeowners will still have to repay the missed amount eventually, but with forbearance, they have more time to find a job or save up the money they need in order to make regular payments again.
If you think forbearance might be a good option for you, don’t hesitate to reach out to your lender. Provide them with details of your financial situation so that they can find a solution that suits your needs when it comes to making payments on your mortgage loan.
This page last updated: March 21, 2022