Mortgage Forbearance – What You Need to Know!

Over the past few months, many have faced financial hardship due to COVID-19. If you’re unable to pay your mortgage payment, it’s important to understand all of your options, as well as the long-term financial impact of neglecting payments. 

What is mortgage forbearance? 

“A mortgage forbearance agreement is a plan made between a lender and a borrower who is struggling to make mortgage payments that attempts to allow the borrower to fulfill the mortgage obligation and avoid foreclosure,” according to experts at Investopedia

In other words, when a homeowner is unable to make full monthly mortgage payments, mortgage forbearance provides temporary relief for a specified amount of time; however, it’s important to recognize that the full amount is still owed to the mortgage lender. 

Mortgage forbearance is a method of temporary financial relief; therefore, it generally will not be approved by a mortgage lender for more than 12 months. 

How does mortgage forbearance impact credit? 

Credit bureaus will be notified when a homeowner seeks mortgage forbearance – unless the mortgage lender specifically agrees not to disclose this information. Even if they are notified, mortgage forbearance is much less damaging to a credit score than a missed payment and also helps the homeowner avoid foreclosure on their property. 

In order to qualify for a home loan after a period of mortgage forbearance (whether the homeowner is seeking to refinance an existing property or purchase a new property), most mortgage lenders will require the forbearance to be paid in full, as well as on-time payments to be made for the past 12 months. 

How does mortgage forbearance work? 

You will need to contact your mortgage lender to request forbearance. It is important to understand that not all homeowners will be approved for a period of mortgage forbearance. 

Qualification requirements vary by lender, but the process generally begins the same with an application submitted by the homeowner. According to experts at NerdWallet, you will need the following information to get started: 

  • Your most recent mortgage statement
  • Estimate of current monthly income
  • Estimate of current monthly expenses
  • An explanation of your specific financial hardship

Once approved for mortgage forbearance, the homeowner and mortgage lender must agree on the specific terms of the agreement, which may include: 

  • Length of forbearance period
  • Monthly payment due during the forbearance
  • Whether or not the forbearance will be reported to credit bureaus
  • The timeframe for the homeowner repaying the amount of relief granted during the period of forbearance

Keep in mind that the mortgage loan will still accrue interest each month, regardless of whether or not payments are skipped or lowered. Once the period of forbearance ends, the homeowner must repay the lender according to the agreed upon terms. 

Repayment terms may include reinstatement (payment of a lump sum) or a repayment plan, which spreads out the amount due over the course of several months (repaid in addition to the regular monthly mortgage payment). 

If a homeowner does not have the funds to satisfy either a reinstatement or repayment plan, it may be time to consider a mortgage loan modification

As always, it’s important to contact your individual mortgage lender to discuss your specific financial situation. You may be surprised at the number of options available for homeowners, especially during times of hardship.