“If you’re having trouble making your mortgage payments, contact your lender to see if you qualify for a forbearance. boonchai wedmakawand/Getty Images
Mortgage forbearance is a temporary pause or reduction in monthly mortgage payments for a homeowner experiencing financial hardship. It’s not loan forgiveness; instead the deferred payments do need to be repaid at some point. But mortgage forbearance can be a lifeline for homeowners who unexpectedly lose their job or suffer losses from a natural disaster, including the COVID-19 pandemic.
The key to avoiding foreclosure during a financial crisis is to ask for help immediately, says Chuck Kracht, director of loan servicing for the Idaho Housing and Finance Association, which offers free loan counseling to struggling borrowers.
"That’s the best advice I can give to anyone," says Kracht. "The second anyone has any sort of trouble, they need to call their mortgage servicer or lender, or a loan counselor."
Time is of the essence, because if you’re able to stay current on your mortgage payments not only will your lender be more open to forbearance, but your credit also won’t take a hit. During forbearance, paused payments aren’t reported to the credit agencies as delinquent if you were on time with your previous monthly payments.
"Mortgage forbearance is when a lender or mortgage servicer either pauses or lowers your payment for a limited period of time," says Kracht. "It’s designed to provide payment relief during a short-term financial difficulty."
In non-pandemic times, forbearance plans are typically offered as a way to keep borrowers in their homes during a period of unemployment or recovery from a natural disaster like a hurricane or wildfire.
The terms of a forbearance agreement depend on the borrower’s specific financial situation, so lenders typically ask for financial records like monthly income and expenses. Sometimes the mortgage payment is reduced and other times it’s suspended entirely. Kracht says that the typical length of forbearance runs from three months to a year.
How Are Deferred Payments Repaid?
Mortgage forbearance is a temporary solution to financial hardship, not a long-term fix. Once a borrower is back on their financial feet, Kracht says that there are three standard options for repaying a forborne mortgage:
- Tack it on to the end. Many lenders will allow homeowners to move all deferred payments to the end of the mortgage. Think of it as a no-interest second loan that’s repaid either when the house is sold or when the original mortgage is fully repaid.
- Add it to your monthly payment. A second option is to slowly repay the deferred amount as a small increase in your remaining monthly mortgage payments.
- Pay it off in one lump sum. While this option is less common, some borrowers pay off the full amount of deferred mortgage payments immediately after the forbearance period ends.
Benefits and Drawbacks of Mortgage Forbearance
Forbearance is a smart option for both borrowers and lenders. For borrowers, the biggest plus is that it offers a temporary break from monthly mortgage payments without adversely affecting their credit. Forbearance gives them much-needed time to find a new job or recover from a disaster without technically missing a payment.
Kracht says that forbearance is a good deal for banks and mortgage lenders, too, even if it means a reduction or pause in payments, because anything is better than foreclosure.
"The foreclosure process really doesn’t benefit anybody," says Kracht. "It’s very costly to go through foreclosure. The alternative is retention, keeping somebody in their home, which is the best option."
The main drawback to forbearance would be that if you have trouble paying the mortgage in general (because you don’t earn enough for instance) at some point, the payments are going to come due. As we said earlier, loan forbearance is not the same as loan forgiveness, so the unpaid debts continue to accrue.
Mortgage Forbearance and the CARES Act
Before the COVID-19 pandemic, a few states had created forbearance programs to provide temporary mortgage relief after a storm like Hurricane Harvey in 2017, but the incredible job losses caused by the pandemic — 22.2 million new unemployment claims in March and April 2020 alone — required a whole new level of emergency mortgage assistance.
Under the CARES Act, homeowners affected by the pandemic are automatically granted mortgage forbearance for 180 days with an option for extending an additional 180 days if needed. Kracht says that the biggest difference between the forbearance options authorized by the CARES Act and regular forbearance plans is how simple and streamlined the process is for obtaining them.
Usually a lender or mortgage servicer will require financial statements and records before extending an offer of forbearance, but not under the CARES Act.
"All that’s required is for the borrower to call the mortgage company and say that they’ve been affected," says Kracht. "At that point, the mortgage servicer or lender will put them on a forbearance plan, no questions asked and no financial information required."
The repayment options under the CARES Act are the same as regular forbearance agreements. An estimated 3.6 million households, or 6.8 percent of all active mortgages were in COVID-19-related forbearance, according to one report from October 2020.
What If Forbearance Isn’t Enough?
Forbearance is meant to be a short-term pause in mortgage payments while a borrower gets back on their feet, but what if the forbearance period is set to expire and the financial situation hasn’t improved?
Foreclosure is always a possibility, but as Kracht says, lenders have their own reasons for wanting to keep borrowers in their homes and will only turn to foreclosure as a last resort. He explains that the best advice is to call your lender or a free and confidential loan counselor (find one near you) as soon as you realize that there may be difficulty making payments when the forbearance period ends.
At that point, the best option for you and your lender is to make adjustments to your mortgage that make payments more affordable, either by refinancing the mortgage at a lower interest rate or creating some kind of customized payment plan that better fits your budget.
Now That’s Cool
In response to the pandemic, the Federal Housing Finance Agency (FHFA) has extended its foreclosure moratorium for all homes with federally backed loans (Fannie Mae and Freddie Mac) until at least Dec. 31, 2020.