Mortgage Forbearance: Understanding the Basics

When your budget is tight due to a financial setback, figuring out how to handle expenses is overwhelming. Thankfully, there are options like mortgage forbearance to ease the financial burden resulting from crises like the COVID-19 pandemic. Mortgage forbearance is when your mortgage servicer or lender allows you to pause or reduce your payments for a period of time. 

Many homeowners, struggling with paying bills and making mortgage payments, don’t consider forbearance because they aren’t sure how it works. Although mortgage forbearance isn’t ideal, it can be a viable option for borrowers to get back on track with monthly payments and avoid foreclosure. The first step is to fully understand what mortgage forbearance is, and then figure out if it’s worth it.

What Is Mortgage Forbearance? 

Mortgage forbearance is when a homeowner can suspend their mortgage payments temporarily because of financial hardship. Although payment deadlines are delayed, the borrower is still required to make all mortgage payments in the future. 

Simply put, mortgage forbearance may be an option if you:

• Already missed mortgage payments or you are about to miss a payment
• Experienced a temporary financial hardship

One of the most common misconceptions is that “forbearance” means “forgiveness.” However, mortgage forbearance doesn’t mean any payments are erased. Even though forbearance is less damaging to your credit score than a foreclosure, credit penalties are still possible down the line. 

It’s wise to rule out any alternatives before deciding to move forward with forbearance. Although the following options aren’t ideal, it’s important to ask yourself these questions:

• Have you considered pulling money from retirement accounts? The Coronavirus Aid, Relief, and Economic Security (CARES) Act allows withdrawals up to $100,000 from retirement savings without penalty. 
• Have you considered borrowing from a credit card or making use of overdraft credit lines to cover mortgage payments? 

How Mortgage Forbearance Works

Mortgage forbearance agreements are offered to homeowners who have suffered a significant income loss. Applying for mortgage forbearance can take 30 to 60 days for most programs. There are two main ways mortgage forbearance can occur:

• Your mortgage company can temporarily suspend your mortgage payments for a designated time period.
• Your mortgage company can allow you to make reduced payments for an agreed-upon period.

If you qualify for forbearance, you and your mortgage company negotiate the terms of your agreement. You will decide on the length of the mortgage forbearance period, your payment amount, and the terms of repayment. During times like the pandemic when millions of people need mortgage relief, be proactive but also be prepared for a long call wait time.

How to Apply for Mortgage Forbearance in 2 Steps

Step 1: Verify Your Mortgage Type

The type of mortgage assistance available to you depends on your mortgage type. Is your mortgage loan federally backed? Agencies and entities with federally backed mortgages include:

• Government-Sponsored Enterprises (GSEs) such as Fannie Mae and Freddie Mac that deal with conventional loans.
  • Verify if your loan is backed by Fannie Mae here.
  • Verify if your loan is backed by Freddie Mac here.
• The Federal Housing Administration and U.S. Department of Housing and Urban Development guarantee FHA and HUD loans.
  • Verify if your loan is FHA-backed or HUD-backed here.
• The Department of Agriculture guarantees loans such as USDA Direct and USDA Guaranteed. 
  • Verify if your loan is backed by the USDA here.
• The Department of Veterans Affairs guarantees VA loans.
  • Verify if your loan is VA-backed here.

There are certain circumstances, such as the COVID-19 pandemic, that prompt the government to pass laws qualifying a mass amount of homeowners for mortgage forbearance. For example, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law and helps homeowners with federally backed mortgages. 

Under the CARES Act, homeowners with federally backed mortgages are eligible to temporarily pause or reduce their payments, without any negative impact on their credit score for payments missed during the approved forbearance. If your mortgage loan isn’t backed by a federal agency or entity, the loan won’t be covered by the CARES Act. In this case, it’s important to contact your loan service provider. 

If you don’t have a federally backed mortgage, you can find your loan servicer’s name by searching the Mortgage Electronic Registrations Systems (MERS) website here. Also, keep in mind that the mortgage servicer you pay every month may not actually own your mortgage. The Consumer Financial Protection Bureau (CFPB) outlines how to find out your mortgage owner in three easy steps here.

Step 2: Contact Your Lender to Discuss Mortgage Relief Options

Once you know your mortgage type and owner, it’s time to contact your lender to discuss your mortgage forbearance options. Many experts recommend reaching out to a certified housing counselor first and then having them assist you with contacting your lender. Housing counselors can help avoid confusion and ensure that borrowers and lenders understand each other. 

Whether you work with a counselor or not, be sure to gather the following information before calling your lender: 

• Your current and future income estimates
• An estimate of your current monthly expenses
• Your most recent mortgage statement
• Documentation of what caused your financial hardship
• An estimate of how long you will struggle to make mortgage payments

Remember to record the name of who you speak with, and take thorough notes during your conversation. Every step of your forbearance application process should be documented in writing. Be careful not to make your forbearance decision based on a single conversation with your lender. Borrowers who rush into forbearance could regret their decision and risk dealing with credit issues or even foreclosure. 

Mortgage Forbearance Repayment Tips

If you decide to move forward with mortgage forbearance, make sure there is an accurate paper trail to avoid issues in the future. After your application submission, look for an email or letter of approval with terms of your forbearance and details of your repayment plan. 

There are multiple ways of handling mortgage repayment, depending on if your loan is federally backed or privately owned. Government-backed loans allow you to postpone mortgage payments up to a year, meaning you’ll eventually have to repay one year’s worth of mortgage and interest. Another option is loan reinstatement, which is practical if you’ve determined you can bring your mortgage current by repaying your suspended payments in one lump sum. 

In some cases, individuals can make partial payments, during their forbearance and that will lower their overall balance due when the period ends. If you’re still struggling at the end of the forbearance period, your mortgage company will usually work with you to decide the best course of action. Some common options that are offered as additional assistance include:

• Modifying your loan. Loan modification might not always be possible, but sometimes you can work with your mortgage company to change the terms of your mortgage to bring it current.
• Deferring payments. Although federal loans under the CARES Act are not approved for deferment, there are some cases where deferment of suspended or past due payments (including interest, taxes, and insurance costs) are possible.
• Extending your forbearance plan. A forbearance extension is a viable option if you have a federally-backed mortgage. For example, The CARES Act allows lenders to extend the forbearance period for up to an additional 180 days without fees, penalties, or additional interest added to your account. 

Regardless of your situation, be sure to clarify every detail of your forbearance repayment agreement with your mortgage lender so there aren’t any surprises. 

Additional Resources

There are many free government-approved educational resources available for homeowners to learn their options. For example, HUD-approved free housing counseling agencies can help you negotiate with your lender or loan servicer. You can also call 1-888-995-HOPE (4673) for free housing counseling. To avoid fraudulent housing counselors or other mortgage scams, here are some examples of red flags:

• They charge a high up-front fee for their services.
• They make baseless promises, such as promising to get you a loan modification.
• They ask you to sign over your property title.
• They ask you to sign vague paperwork that’s difficult to understand.
• They tell you to make payments to someone other than your servicer or suddenly tell you to stop making payments.

While some fee-based counselors are legitimate, be sure you know that free counseling is available. Be vigilant because there are plenty of scammers who try to take advantage of people making mortgage forbearance agreements. 

Remember, forbearance should be a last resort. There are a few strategies you could try to avoid moving forward with forbearance:

• Sell valuables to make enough money for at least one payment.
• Find a second job or start a side hustle.
• Borrow money from a family member or friend.
• Withdraw money from a retirement account.
• Take advantage of overdraft credit lines.
• Borrow from a credit card.
• Start a crowdfund.

As a homeowner financially struggling due to a hardship like the COVID-19 pandemic, remember that you have options. Although mortgage forbearance isn’t an ideal scenario, sometimes it’s the best choice for your situation. In addition to mortgage forbearance, using a budgeting app like Mint can help you commit to making smart spending decisions. Even during times of crisis, you have the power to budget and create a brighter financial future for you and your family.

Sources: Consumer Financial Protection Bureau 1, 2, 3 | Investopedia | Treasury.gov