Mortgage Forbearance: What It Is And How It Works

No one expects to have trouble making payments on their house when they move in, but we can’t predict what curveballs life might throw our way. Mortgage forbearance offers a way for servicers to temporarily pause your mortgage payment to offer relief at a time when money is tight.

Mortgage Forbearance Definition

Under mortgage forbearance, your servicer allows you to temporarily pause or reduce your mortgage payments due to financial hardship. You’re still responsible for the full loan amount.

Forbearance does not permanently absolve the unfulfilled debt and alleviate you from having to pay what you owe. Instead, you’re given the opportunity to temporarily lower your financial burdens and repay any missed or reduced payments at the end of the forbearance period. Your servicer will qualify you for an option to make up your missed payments.

The goal of mortgage forbearance is to find a way for you to stay in your home. However, if that’s not possible, your servicer will work with you so you can gracefully exit your home while avoiding a full foreclosure.

Is Forbearance Different From Deferment?

Although the two terms are sometimes confused, mortgage forbearance is different from deferment. Mortgage forbearance is the actual pause or reduction in payments. Deferment refers to an option for making up past-due payments by moving them to the end of the loan. It’s one of several options your servicer may evaluate you for.

Depending on the type of mortgage you have, you may receive a partial claim instead of a deferment. Deferral places payments at the end of the loan to be due when the loan is paid off. A partial claim takes this a step further in that the past-due payments are made into a second lien paid off when the loan is due.

How A Forbearance Agreement Works On A Mortgage

The first step to qualifying for any forbearance is to speak with your mortgage servicer. Your servicer is who you make your mortgage payment to each month. It could be your original lender, but that’s not always the case. Your servicer will ask you to share some information about your situation including the nature of your hardship as well as your expenses.

The two terms sound similar so we also want to take a moment to talk about the difference between forbearance and foreclosure. While forbearance is a pause or reduction in your mortgage payment, foreclosure refers to the right of your lender take back your home because you defaulted on the mortgage. Forbearance is meant to help you avoid foreclosure.

Your servicer has to agree to put you on a forbearance, so it’s important to communicate with them openly about the nature of your payment problems. If you’re approved, your servicer will require periodic check-ins and the length of your forbearance may be extended. Once the forbearance is over, your servicer will attempt to qualify you for repayment options.

While this is a high-level overview of the process, the following sections will go over more specifics.

Mortgage Forbearance Eligibility

When it comes to eligibility, you’ll have to show evidence of a hardship. This could be something like a job loss or bills for an unanticipated medical treatment. Forbearances may also be issued after natural disasters and other events affecting broad swaths of the population in an area. However, it’s important to know your lender has to approve this.

Mortgage Forbearance Length

The actual length of the forbearance is often going to depend on the nature of your hardship. Your servicer will approve an initial forbearance and subsequent extensions on a case-by-case basis. While there’s no end date that applies in every situation, most last less than a year. It’s also important to remember that the longer your forbearance continues, the more you’ll need to pay back.

Mortgage Forbearance Payment Options

Once your forbearance ends, it’s time to resume making payments. Your past-due payment can be handled in one of several ways.

The Full Amount Is Paid After Forbearance Ends

The fastest way to become current on your mortgage is to pay the full amount when the forbearance ends. This is referred to as reinstatement. It won’t work for everyone, but this could be an option for you if you’ve been working without a paycheck for a while and your employer comes through with promised back pay. You might also be reimbursed for medical bills.

The Full Amount Is Paid During The Rest Of The Mortgage Term

If you don’t end up paying it off at the end of the forbearance itself, there are a couple of options for your past-due payments to be paid off during your loan term:

• Repayment plan: The past-due amount is added to your monthly payment in increments to pay off payments that would have been due during your forbearance. Repayment plans are typically short-term in nature, often lasting 3 – 6 months.
• Loan modification: In a loan modification, the terms of your loan are modified to add the past-due payments back into your loan balance. Both the interest rate as well as the term of your loan are subject to change. If you’re wondering about the difference between a loan modification and refinance, a loan modification changes the terms of an existing loan. A refinance is a new one altogether.

The Full Amount Is Paid At The End Of The Mortgage Term

In some instances, you may qualify for a deferral or partial claim. You resume making your regular payment after forbearance. Payments missed during forbearance are due when you sell the home, refinance or when your loan matures.

Staying In The Home Isn’t Feasible

If you and your servicer have gone over the options and you either don’t qualify or it doesn’t make financial sense for you to stay in your home, there are options you can discuss with your servicer that don’t amount to a full foreclosure:

• Sell your home: If you can’t stay in your home, this is the best possible outcome because there’s no negative credit impact. After paying off the mortgage, you can take whatever is left over and use it toward finding your next living arrangement more in line with your current budget.
• Short sale: If property values have fallen enough that you cannot sell your home for enough to pay off the mortgage, your servicer may agree to help facilitate a short sale. In a short sale, your servicer has to accept all bids and has final approval over the winning offer. In exchange for you keeping the home in sellable condition, your servicer may agree to give you some money toward finding another place.
• Deed-in-lieu of foreclosure: In a deed-in-lieu, you voluntarily hand the property over to your servicer. If your servicer agrees, you would be given a move out date. This is another case where your servicer may be able to give you some consideration for maintaining the condition of your home.

Pros And Cons Of Mortgage Forbearance

Mortgage forbearance has its pros and cons. Let’s run through them.

Mortgage Forbearance Pros

• Temporary financial relief from mortgage payments: This provides breathing room in the form of temporarily suspended or reduced payments. This could give you the ability to sort out your financial situation.
• Could help to prevent foreclosure: You’ll want to speak to your servicer at the earliest sign of a problem so that they can help you before you start going down the path toward a foreclosure of your home. Forbearance is often the first tool used by servicers because it buys time to figure out how to best help in your individual situation.
• Various options for repayment: Your servicer will attempt to qualify you for one of several options to make up past-due payments from the forbearance. This could be everything from reinstatement to modification to deferral.

Mortgage Forbearance Cons

• You may not be eligible: You have to show a specific hardship. Your servicer may require you to share documentation and possibly show that this is temporary.
• Payments could increase after forbearance: If you end up on a repayment plan or loan modification, your payments could increase as you pay back your past-due payments either temporarily or over the remainder of your term.
• Potential to impact your credit score: A forbearance typically has a negative impact on your credit score because it’s a sign that you’ve had payment trouble with existing loans. There are one-off scenarios such as natural disasters where forbearance may not be reported to the credit bureaus.

Other Options For Financial Relief

While it’s a good idea to do this before falling behind on your mortgage payment, one thing you might look into is refinancing. This could be particularly impactful if rates have fallen since you bought your home.

Alternatively, you could lower your payment by going from a shorter term to a longer one. You might pay more in interest over time, but the monthly payments would be more affordable.

How To Ask Your Lender For Forbearance On Your Mortgage

The process for requesting potential forbearance from a mortgage servicer may vary, but the information they ask for is likely to be the same. Be sure to have the following available:

• Your most recent mortgage statement
• An explanation of your financial situation
• Your estimated monthly income
• Your estimated monthly expenses

Rocket Mortgage^® clients who are worried about looming payment trouble can get in touch by filling out our Application for Success.

FAQs About Mortgage Forbearance

Let’s move to answering some common questions around mortgage forbearance.

Will my payment period change after the forbearance?

Your payment period won’t change after forbearance. It will be monthly or biweekly as it was prior to the forbearance.

Does mortgage forbearance affect my interest rate?

While not affected by the forbearance itself, mortgage rates may change while your payment is paused or reduced if you have an adjustable-rate mortgage scheduled for adjustment. They could also adjust after forbearance if you make up your past-due payments through a home loan modification.

Does mortgage forbearance affect my credit score?

A mortgage loan being on forbearance does typically have a negative impact on your credit score because it’s an indicator that you’ve had trouble meeting your obligations. There are special exceptions to the credit reporting rules that are often put in place following natural disasters. Your servicer should be able to tell you whether the forbearance will be reported.

Can I refinance if I’m in forbearance?

Refinancing while on an active forbearance is possible, depending on the type of loan you have. In this arrangement, your back payments would be paid off in a cash-out or rate-and-term refinance. But it’s important to remember that most forbearances will lower your credit score. This makes it more difficult to qualify while in forbearance.

The Bottom Line

Mortgage forbearance is a temporary pause or reduction in your obligation to make monthly mortgage payments. It may make the difference in you keeping your home. While it does not ultimately eliminate outstanding debts, which must be paid when the forbearance period ends, it can prove a useful temporary solution for homeowners who are struggling financially.

If a loss of income or other circumstances are putting the squeeze on your budget, you’ll want to consider giving your servicer a call to discuss mortgage forbearance today.

Forbearance is a temporary solution, often just the first step in finding financial relief. If you’re in need of a more permanent fix to the challenges you’re facing, the ultimate outcome may be a refinance or loan modification. Contact your servicer. Rocket Mortgage clients looking for relief can fill out our Application for Success.