The stress of a looming mortgage payment can feel crushing when finances take a downturn. In response, many homeowners begin searching for relief options until they can get back on their feet. Forbearance is a possible solution, but is it best for your situation? We’ll cover the basics of forbearance to help you make an informed decision.
What is mortgage forbearance?
When you arrange for forbearance with your mortgage lender, they will temporarily suspend or lower your mortgage payments for a set amount of time. This reprieve is meant to assist homeowners who are experiencing temporary financial hardship, and need time to recoup their income or deal with unforeseen expenses. A forbearance is not loan forgiveness or a grant. The amount of payment missed during the forbearance period will still be owed.
Typical reasons for seeking forbearance include job loss, an injury or illness, or a natural disaster event. The COVID-19 crisis has created a spike in unemployment and caused an unprecedented number of homeowners to look into their forbearance options. Before you contact your mortgage lender, here are some things to consider.
How does forbearance work?
The forbearance terms that will be available to you depend on multiple factors. These include the type of loan, your lender, and the owner or investor requirements in your loan. Regardless of the terms of your forbearance, interest on your loan will continue to accrue as normal during the forbearance period.
Depending on your specific needs and what your lender is able to offer, you may either have your payments completely paused OR lowered by a set amount. The sum of the payments not made during the forbearance period must be repaid to your lender when the forbearance ends. How and when you will be expected to repay the missed payments will depend on the terms agreed upon with the lender.
In general, there are three types of forbearance repayment options:
- Reinstatement: When the forbearance period ends, you will be required to repay the total of the missed payments in one lump sum. This type of repayment can be difficult or impossible to manage in a strained financial situation. If this is the only repayment option available to you, your ability to repay the lump sum should be carefully considered.
- Repayment plan: The sum of missed payments is paid back by being divided up over a span of typically 6 to 12 months following the forbearance. The amount this works out to be per month will be added on top of your normal mortgage payments. This will result in your monthly mortgage payment being higher than it was before the forbearance, until the sum of missed payment is covered.
- Repayment at the end of mortgage: The amount of payments missed during forbearance is repaid by adding them to the end of the loan term, extending the length of the mortgage. This means if you took six months of paused payments, your loan term will be extended by an additional six months.
It’s critical that you fully understand your forbearance repayment agreement and whether or not you can manage the repayment terms when it ends.
Does mortgage forbearance impact credit scores?
Before you agree to a forbearance, ask your lender whether or not your credit will be impacted. Some lenders may agree to not report the forbearance to credit bureaus, but this is not guaranteed and should not be assumed. In many cases, the forbearance agreement with your lender will be reported to credit bureaus, which can substantially affect your credit score.
How does the CARES Act affect forbearance?
On March 27, 2020, the CARES Act, (Coronavirus Aid, Relief & Economic Security) was signed into law. This act applies to homeowners with conventional loans owned by Fannie Mae or Freddie Mac. It also applies to government-backed loans insured by the Federal Housing Administration (FHA), The Department of Veteran’s Affairs (VA Loans) and The Department of Agriculture (USDA Loans).
Under the CARES Act, those with eligible loans can arrange for forbearance with the following terms:
- 180-day mortgage forbearance and one 180-day extension
- Waiver of late fees or penalties
- Suspension of late payment reporting to credit bureaus
- No documentation required to prove a COVID-19 hardship
If you plan to seek forbearance under the CARES Act, you still need to discuss with your lender how you will be required to repay the missed payments. Applicable loans will continue to accrue interest during the forbearance period. If your loan type is not covered under the CARES Act, your mortgage provider may still be able to offer forbearance to you, but the terms will likely be different.
Have more questions about forbearance? Want to know other solutions to manage your mortgage during financial hardship? Contact us for more information and we will connect you with one of our mortgage specialists.