What is Mortgage Forbearance?
Mortgage forbearance is when your lender agrees to let you temporarily stop making your mortgage payments. You can request a mortgage forbearance agreement if you encounter a sudden financial hardship, like losing your job or taking a drastic pay cut.
At the height of the COVID-19 crisis, the federal government offered special options for mortgage forbearance to help as many people as possible avoid losing their homes. Some of these options are still available today, but many have expired now that the pandemic will soon no longer be an official “state of emergency.”
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Mortgage forbearance: What is it?
Mortgage forbearance is an agreement between you and your mortgage lender or servicer to temporarily pause or lower your mortgage payments and avoid foreclosure. “Forbearance” means something like “patience” — the lender is showing patience in collecting the money you owe them.
To be clear, though, forbearance isn’t free money or loan forgiveness. The missed payments must be repaid later — otherwise, your loan goes into default, and you could lose your home to foreclosure.
A forbearance agreement is meant to help homeowners through temporary hardships, such as a sudden job loss, natural disaster or extended illness without paid sick leave.
Because many Americans struggled with layoffs and illness due to the COVID-19 outbreak, the federal government passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020, which compelled lenders to offer specific forbearance options to borrowers with federally backed mortgages. However, this portion of the CARES Act expired in 2021. That doesn’t mean forbearance is now off the table for homeowners; it simply means it may not be as easy to access as it was during the pandemic.
Good news for FHA loan borrowers: COVID-19 protections extended
There’s one big exception to the expiration of pandemic-related protections: homeowners with FHA loans. The Federal Housing Administration (FHA) has extended all of its COVID-19 loss mitigation options to all borrowers with FHA loans, regardless of the reason for their financial hardship, and will keep these options in place until Oct. 30, 2024.
In addition, for borrowers who are still struggling financially for reasons related to the pandemic, the FHA will continue to offer COVID-19-specific forbearance — just be sure to request it by May 31, 2023, which is the official date the COVID-19 national emergency will end.
How mortgage forbearance works
What all types of forbearance have in common is that you’ll stop making payments (or make reduced payments) for a certain period of time, but where they differ is in how you’ll repay those missed payments once the forbearance period ends. There are three types of forbearance:
1. Reinstatement. You’ll stop making payments for a set time and then, once that time period ends, you’ll make all of those payments at once in a lump sum.
→ Best if: Your financial hardship has been resolved at the end of the forbearance period and you can afford to pay off your missed payments immediately.
2. Repayment plan. You’ll make reduced payments or no payments for a set amount of time, and then resume making monthly payments. A fraction of the payments you missed is added to each monthly payment until the total missed amount is paid in full.
→ Best if: You can’t afford to repay the missed payments all at once.
3. Payment deferral. You’ll stop making payments for a set period of time, and then resume your regular mortgage payments. The amount you owe in missed payments is due when the home is sold or the loan is paid off and, in the meantime, won’t incur interest charges.
→ Best if: You can’t afford to pay anything over and above your regular mortgage payments right now.
Payment deferral for FHA Loans
For those with FHA loans, the U.S. Department of Housing and Urban Development (HUD) offers “partial claim” loans, which are interest-free loans used to cover payments missed during a forbearance period. The loan doesn’t have to be repaid unless the home is sold or refinanced, or the original mortgage is otherwise paid off.
How long you’ll be allowed to make either reduced or suspended payments can vary, but forbearance typically lasts three to six months, and can often be extended out to one year if you continue to face financial difficulty.
How to apply for mortgage forbearance
If you think you could benefit from mortgage forbearance, you’ll need to follow these steps:
Step 1: Reach out to your mortgage lender or servicer. Not all mortgage companies offer forbearance, so you’ll have to do a bit of research to find out if it’s an option.
Step 2: Confirm your eligibility. Both you and your property need to meet the eligibility requirements for forbearance. These can vary from lender to lender, so ask your mortgage company about the specific guidelines they use.
Step 3: Apply. The application process for a forbearance agreement varies depending on a number of different factors, including the type of loan you have, your loan servicer and the investor requirements on your loan. Your lender can help walk you through the process, but expect to be asked for income and tax documentation, as well as details about the financial hardship you’re facing.
Step 4: Review your lender’s decision. Your lender should let you know if you’ve been granted forbearance within 30 days of receiving your application. If they’ve offered you a mortgage forbearance agreement, it’ll outline the terms you’re agreeing to, including how your payment history will be reported to credit bureaus, how the skipped payments will be repaid once the forbearance period ends and the end date itself.
Step 5: Know what your options will be once forbearance ends. What happens after your forbearance ends depends both on your financial situation and on your lender. Your lender might let you pay the entire past-due balance in a lump sum at the end of the forbearance term, or chip away at it with monthly payments — but these options are only going to be possible if you’ve gotten back on your feet within the forbearance period. If you haven’t, you can request an extension of forbearance. If your extension is denied, you may have to move on to other options that won’t prevent you from accruing interest on the payments you’ve missed, or that may not let you stay in your home.
Does mortgage forbearance affect your credit?
Forbearance can affect your credit. On a technical level, any payments missed during the forbearance period — even if you’re meeting the terms of the forbearance agreement — are late payments because you’re not holding up your end of the deal with regard to your original mortgage loan. That said, lenders aren’t required to report these delinquent payments to credit bureaus, and often won’t as long as you’re adhering to your forbearance agreement. If you aren’t sure, it can’t hurt to ask your lender whether they plan to report payments missed during forbearance as delinquencies.
However, it’s important to keep the larger view in mind: Even if the lender were to report your missed payments to the credit bureaus, forbearance can keep you out of foreclosure, which is potentially far more damaging to your credit. A foreclosure will stay on your credit report for seven years, whereas a missed payment only remains for three.
You might also be able to get delinquent payments removed from your credit report once you’re back on track. It isn’t a guarantee, but in some cases lenders will change how they’ve reported a late payment — sometimes called a “goodwill adjustment” — if you write them a letter explaining your situation.
Pros and cons of mortgage forbearance options
| Type of forbearance plan | Pros | Cons |
|---|---|---|
| Reinstatement with suspended payments: You’ll stop making payments for a set time and pay them back in a lump sum | No mortgage payment for a set period of time (typically three to six months) | Entire balance of paused payments is due once the forbearance period ends Interest accrues on missed payments |
| Reinstatement with reduced payments: You’ll make reduced payments for a set time, then pay back the missed portions of those payments in a lump sum | Lower payment for the set time period Lower balloon payment due at the end of the forbearance | Balance of reduced payments due at the end of the forbearance period Interest accrues on the unpaid portion of the payments |
| Repayment: You’ll pay reduced or no payments for a set time, then pay back the missed payments with a monthly contribution that’s added to your mortgage payment | Lower or no payments for the set time period No balloon payment at the end of the forbearance period | New monthly mortgage payments are higher than your pre-forbearance payments Interest accrues on missed payments |
| Payment deferral or partial claim: You’ll stop making payments for a set time, then be required to repay the paused payments at the end of your mortgage term | Gives you more time to pay back the missed payments Interest won’t accrue on missed payments | A balloon payment doesn’t provide a structured plan for paying off the missed payments over time |
Alternatives to forbearance
If you’ve reached the end of your forbearance period — and exhausted all of your extensions — but you still aren’t able to make your regular mortgage payments, you should look into forbearance alternatives. Some of these options may be more expensive than forbearance or may not keep you in your home, but they can help you avoid the often long-lasting psychological and financial effects of foreclosure.
Loan modification
What it is: Lenders allow you to change the original terms of your loan permanently. Mortgage modification options may include extending your loan term, lowering your rate or reducing your principal balance.
Why you’d choose it: You’re 60 days or more behind on mortgage payments and are unable to make your current payments.
Mortgage refinance
What it is: A refinance typically replaces your current mortgage with a new one that has a lower interest rate and monthly payment. Refinance options on FHA loans and VA loans are available with no income verification or appraisal requirements.
Why you’d choose it: You can still qualify for a mortgage and just need a little extra room in your budget to make ends meet.
Short sale
What it is: A short sale allows you to sell your home for less than its market value, and ask the lender to forgive the difference. There may be tax ramifications of a short sale, which are worth researching or discussing with a tax professional. In general, though, the ramifications of a foreclosure are so severe that it’s usually worthwhile to avoid the foreclosure process.
Why you’d choose it: You have little to no equity and want to avoid a foreclosure.
Deed-in-lieu of foreclosure
What it is: Also called a “mortgage release,” a deed-in-lieu of foreclosure lets you transfer ownership of your home to your lender if they approve the request. In return, you’ll be released from your obligation to pay your mortgage.
Why you’d choose it: You want to avoid foreclosure. In some cases, you may be eligible to receive some money for relocation assistance or stay in the home for up to a year as a renter.
Sell your home
What it is: Selling your home can be tough — but with the correct planning, timing and sale price, it can really pay off.
Why you’d choose it: There’s enough equity in your home to pocket cash from the sale, and you could potentially rent or live with family until you’re on a stronger financial footing that would allow you to buy again.
Beware of mortgage forbearance relief scams
Whether or not you’re behind on mortgage payments, scammers may contact you posing as government agencies, mortgage relief organizations or attorneys. Follow these steps to avoid falling prey to their tactics:
- Never pay upfront for any advice or mortgage relief.
- Find a HUD foreclosure avoidance counselor in your area for free assistance.
- Don’t provide personal or financial information, like your Social Security number, date of birth, bank statements or credit card account numbers over the phone.
- Contact the Federal Trade Commission (FTC) if you believe you’ve been a victim of a mortgage relief scam.
Frequently asked questions
If your lender chooses to report the payments you’ve missed during forbearance to the credit bureaus, forbearance can damage your credit. However, if it keeps you out of foreclosure, it’s still worth considering. A missed payment will only stay on your credit report for three years, but a foreclosure will remain for seven. A foreclosure will also force you to wait a number of years — seven years for a conventional loan — before you can get another mortgage.
There’s no legal reason you can’t sell your home while in forbearance — however, the details of your situation will dictate whether it’s a good idea. Any proceeds from the sale will have to not only go toward repaying the mortgage payments you skipped during forbearance, but also toward paying off the mortgage in full.
If you have a decent amount of equity, you may be able to sell the house, pay your debts and still walk away with some money in your pocket. However, if you have low, no or negative equity, it may not make sense to sell. If the sale price won’t cover what you owe, and you’ll still owe a significant amount, you may want to hold off.
Yes, having a forbearance in your past can affect your ability to get a new mortgage — but, due to the pandemic, it’s a little bit complicated exactly how. Prior to COVID, a forbearance generally meant that you’d have to wait 12 months before getting a new mortgage. However, if your forbearance was during COVID, it may not have affected your credit and may not make you subject to waiting periods.
If you agreed to make partial or reduced mortgage payments during your forbearance period, having missed any could also cause problems when you want to take out another mortgage. You may have to catch up on those missed payments, in addition to a waiting period, before you can take out another mortgage. Any waiting period that does apply will be determined by your future loan program.
If you have an escrow account set up to pay your annual property taxes and homeowners insurance premiums, your lender will likely continue to make those payments until the forbearance period ends. If you have an escrow shortage, in some cases the lender will cover the shortfall to avoid tax issues.