Does mortgage forbearance affect your credit report? What homeowners need to know

Understanding forbearance

Forbearance is a pause or reduction in your monthly payment during a hardship. The terms are based on your agreement with your servicer, but these are typically aimed at providing short-term relief, often for 3 – 6 months. You work with your servicer to qualify for an option to pay back your past-due payments after the forbearance.

You’ll need to be approved for a forbearance by your servicer. A forbearance should only be used if you’ll have the funds to reinstate at the end of the forbearance term. If you don’t reinstate, you'll immediately be that number of payments past due. So if you accept a 6-month forbearance and make no payments, you'll be due for 6 months and foreclosure proceedings can start immediately.

Because of this and the probable impact on your credit, forbearance isn’t right for everyone who’s struggling to make their payments. Fortunately, servicers may be able to qualify you for other avenues of relief, including repayment plans, loan modifications, partial claims, or deferrals of payments. Some of these may be used in combination with each other.

Does forbearance impact your credit score?

Mortgage forbearance will impact your credit score, but if you were current leading up to the forbearance, that may be helpful. If you were already late on a payment or two before requesting forbearance, that has a negative impact on your score. Forbearance also doesn’t eliminate debt, so you have to keep on top of both your repayments and your mortgage payments moving forward to maintain your credit score.

Servicers are required to report accurately to credit bureaus, and if your total loan balance is not decreasing because you’re in forbearance, that can and will impact your credit score.

However, if you agree to a reduced payment during forbearance and miss the payment, that will be reported. Missed payments stay on your report for up to 7 years. Not all late payments are the same. Payments 60 – 90 days late are worse than 30-day late payments. Time tends to heal credit scores as well as old wounds. The older a late payment is, the more marginal the impact on your credit score.

Because a forbearance in itself isn’t considered negative, a notation about it may stay on your credit for the life of the loan. However, this is preferable to things that have a negative impact on your score, such as late payments and foreclosure.

Forbearance vs. deferment

When described, forbearance of payments and deferment can sound very similar, so let’s break down the difference.

• Forbearance: Forbearance is a temporary pause or lowering of your monthly payment. At the end of the forbearance the missed payments must be repaid.
• Deferment: Deferral, or deferment, is an option for paying back past-due payments. In a deferral, a limited number of payments can be moved to the back end of the loan to be due when you pay it off.
• Partial claim: A partial claim is functionally the same as a deferral, but the payments at the end of the loan are a secondary lien to be paid off. Some investors do these instead of deferrals.

Can you refinance if you are in forbearance?

It’s possible to refinance while in forbearance. This includes the potential to bring the loan current with funds from the refinance while paying it off. The challenge is going to be what led up to the forbearance. If you have several late payments in the months before the forbearance, your credit score could drop and you might find you have a hard time qualifying.

Note that even if it doesn’t impact your score, lenders may be wary of letting you refinance in the middle of a forbearance because it shows you’re having trouble keeping up with your current payments. At minimum, expect additional underwriting scrutiny. They may ask for letters of explanation.

How to refinance your mortgage after forbearance

Most traditional forbearances outside of those authorized in natural disaster situations or for active-duty military personnel are reported on credit. But forbearance doesn’t have to be a stain on your report. Here’s what you can do to improve your chances to qualify.

Get current or keep up with post-forbearance payments

Make sure that you are either current on your loan or keeping up with the payments under any post-forbearance workout plan. Missed payments hurt your credit. Lenders are already often taking a closer look based on your past forbearance.

If you’re coming out of forbearance, you may need to make a minimum number of payments before you can refinance. For example, the FHA requires three consecutive post-forbearance payments before a purchase and rate-and-term refi. FHA cash-out refinance require a year’s worth of payments. In either case, you can’t be 30 days late at any point.

Keep debt in check

Lenders closely track your debt-to-income ratio (DTI). This compares your minimum monthly debt payments to your pretax income each month. It’s important to be mindful of this as you’re getting back on your feet after financial trouble. It can be easy to rack up credit card debt in an emergency. Getting that under control as soon as you can greatly increase your chances to qualify for a mortgage on the right terms.

The bottom line: Mortgage forbearance may negatively impact your credit

A forbearance is a sign you may have had struggles in the past making your mortgage payment. Lenders take it seriously. But it’s not the major impact a bankruptcy or foreclosure might have. Because of this, if you’ve built the right habits and consistently pay on time, you may be able to refinance during or shortly after forbearance.

Of course, you want to make sure that you’re making the right financial move. If you want to discuss your options, you can contact us today to speak with one of our Home Loan Experts.