Understanding Mortgage Forbearance and Its Impact

Mortgage forbearance is a type of assistance for homeowners who are struggling to make their mortgage payments. It allows you to temporarily stop making monthly payments, or pay a smaller amount, for a set period of time you and the lender agree to. After the forbearance period ends, you go back to making your regular payments, and you also make up for the paused or reduced payments and any interest that accumulated during the forbearance.

Kevin Watson, senior home loan strategist at Churchill Mortgage, says that forbearance is a temporary solution best reserved for certain types of financial emergencies. 

“I will only recommend people use this if they have a job loss or sudden reduced income, medical emergencies, serious losses from natural disasters, or some other crisis arises,” Watson said. “Essentially, unless a major unexpected expense comes up, this should not be an option.”

Forbearance vs. foreclosure: What’s the difference?

Foreclosure is the process by which a lender repossesses a home to recoup its losses after the borrower defaults on their mortgage loan. 

Forbearance is a temporary suspension or reduction in a borrower’s mortgage payments. It’s a way to prevent foreclosure when a financial hardship makes it difficult or impossible to make your mortgage payments.

Who qualifies for forbearance?

Most of the common mortgage loan types, such as conventional, FHA, and VA, make forbearance available to borrowers who meet their eligibility criteria. 

For example, Freddie Mac, one of the two government-sponsored enterprises (GSEs) that buy conventional loans, allows eligible homeowners to skip up to a year’s worth of payments with a standard or disaster-related forbearance.

Fannie Mae, the other GSE that backs conventional loans, allows up to six months initially, followed by extensions, if needed. 

To qualify for forbearance, you’ll need to be able to document your hardship and meet any other conditions your lender establishes.

How do you repay the money?

Your lender may offer one or more of the following options for making up your missed or reduced payments:

• Installments added to regular mortgage payments once they resume
• Lump-sum payment after forbearance or mortgage term ends
• Series of payments after the mortgage term ends via a loan modification

How to apply for mortgage forbearance

The first step is to contact your loan servicer — preferably, before you miss a payment. The servicer is the company you make payments to, so you’ll find it on your statement. 

Once you’ve explained your hardship and asked for forbearance options, you’ll need to gather any documentation the lender requires you to submit with your application, which might include: 

• Recent pay statements 
• Benefit and bank statements 
• Monthly expenses

The lender also might ask for a hardship letter detailing the nature of your hardship and how long you expect it to last.

If it approves your application, the lender will send you a forbearance plan.

“Once you receive the forbearance papers, read through them thoroughly and make sure you ask questions until you fully understand the terms,” Watson says. “If there are any challenges, talk about them. Don’t miss any payments without communicating ahead of time.”

The effects of forbearance on your credit and financial health

For some borrowers, mortgage forbearance has less effect on credit score than missed payments do, which underscores the importance of reaching out to your lender as soon as the hardship begins. 

Lenders may report mortgage forbearance to credit bureaus. If yours does, and it appears on your credit report, it won’t necessarily impact your score if you adhere to the terms of your forbearance plan. However, the actual effects on any particular borrower depends on their lender’s policies, the borrower’s credit profile, and other factors.

In some cases, forbearance may help your credit. Jeff Richardson, vice president and head of marketing and communications, for VantageScore, the credit scoring model created by the three credit bureaus, said in a press release that your loan balance and payments aren’t factored into your VantageScore while the loan is in forbearance. That’s good for your score. But the account remains active, so it contributes to the length of your credit history.

Alternatives to mortgage forbearance

Forbearance isn’t your only option for avoiding foreclosure, and it might not be your best one.

Your first line of defense should be an emergency fund with three to six months’ of expenses in a high-yield savings or money market account, Watson recommends. If you don’t have it, or it’s not enough, you’ll have to explore other options.

“Depending on the amount of time that the emergency lasts, one alternative solution would be to sell the house if it’s expected that income won't be the same anymore,” Watson adds. “However, if the emergency is temporary, possibly a family loan or even a home equity line of credit would give relief for a temporary time until you get back on your feet.”

That said, it’s important to weigh the benefits of staying current on your mortgage against the risk of handling a financial emergency by taking on more debt.

Other mortgage payment relief options you might consider include:

• Refinance: If you’ve not yet missed payments, and you qualify for a new home loan, a mortgage refinance could lower your payments by reducing your rate and/or extending your loan term.
• Reinstatement: You can pay the back payments you owe to stop or prevent foreclosure, without entering into a formal program. 
• Repayment: If you missed payments because of a hardship you’ve overcome or expect to overcome shortly, a repayment plan would let you catch up while paying your loan as usual.
• Loan modification: A modification changes the rate and/or term of your loan, which could reduce your payment. 
• Bankruptcy: A Chapter 13 bankruptcy can stop foreclosure action and give you time to catch up on missed payments.

What to do when your forbearance period ends

You’ll read through your forbearance plan when you receive it, before the forbearance begins. But Watson also recommends reaching out to your lender shortly before ending mortgage forbearance to discuss repayment. 

“Certain loans could have some forbearance protections,” he says.

If you still won’t be able to afford to make payments at the end of your forbearance, your lender might have additional options for you, such as an extension or a loan modification.