What is Forbearance?
Forbearance is defined as the temporary postponement of loan or mortgage payments. As an alternative to forcing a property into foreclosure or defaulting on a loan, lenders and other creditors will grant homeowners forbearance. The lender that holds the loan and their insurers are often willing to negotiate forbearance agreements to avoid the losses caused by a foreclosure. In a forbearance agreement, borrowers must pay back the reduction or the paused payments later. These back payments are usually relocated to the end of the loan so the borrower can resume the current loan payments.
- A lender grants a borrower a forbearance in the form of a temporary delay in loan payments rather than forcing them into default or foreclosure.
- Forbearance agreements are negotiated between the lender and borrower.
- The borrower must provide evidence that they face financial hardship due to a significant illness or job loss.
- Borrowers with government-backed loans and affected by COVID-19 may be eligible for relief.
- There is forbearance available for borrowers affected by COVID-19 until May 1, 2022.
The forbearance option is available for all loans, including student loans and mortgages. The debtor is given additional time to repay what they owe. As a result, struggling borrowers and lenders are both helped. Often, lenders lose money after paying foreclosure and default fees.
Because they do not bear as much financial risk as borrowers, loan servicers (those that collect payments but do not own the loans) may be less willing to work with borrowers on forbearance relief.
A forbearance agreement is negotiated between borrowers and lenders. The chances of getting an arrangement are partly determined by how quickly the borrower can resume monthly payments after the forbearance period. Lenders may approve a total reduction of the borrower's payment or only a partial reduction, based on the borrower's need and their confidence that the borrower will catch up later.
Lenders may give borrowers a variety of options in some cases. Examples include:
In this case, a borrower makes interest payments but does not pay down the principal, a process known as negative amortization. The borrower pays only part of the interest, while the unpaid portion is added to the total debt. The court may order forbearance. CARES Act passed and signed into law in 2020 dealt with the ramifications of COVID-19, including provisions for the forbearance of student loans. While the pandemic was ongoing, some state governments enacted forbearance regulations. As a result of the pandemic, struggling homeowners were also given mortgage repayment forbearance. Below is more information on these updates.
When the forbearance agreement ends, you must still make up for the missed payments, so receiving forbearance does not relieve you of your financial responsibility.
How to Apply for Forbearance
To apply for forbearance on student loans or mortgages, borrowers should contact their lenders or loan servicers. It's most likely they'll have to demonstrate financial hardships associated with an illness or loss of employment to put off payments.
Forbearance agreements are negotiated, so lenders have a lot of discretion when deciding whether or not to assist and to what extent. As a result, the chances of borrowers who have a consistent payment history are higher.
Someone who worked at the same company for ten years without missing a mortgage payment is a good candidate after being laid off. Borrowers who are highly skilled and can land a comparable job within a reasonable time frame are likely to qualify for forbearance. If a laid-off borrower has a spotty employment history or a track record of missed payments, the lender is less likely to grant a forbearance agreement.
COVID-19 Forbearance for Mortgage Payments
Consumers have been offered mortgage forbearance assistance under the CARES Act. Mortgages backed by or sponsored by the federal government are eligible for forbearance under COVID-19. For example, the federal government guarantees the following mortgages:
- U.S. Department of Agriculture (USDA)
- U.S. Department of Veterans Affairs (VA)
Forbearance can be granted up to 180 days with an additional 180 days of extension.
HUD/FHA, USDA, or VA loans has a Sept. 30, 2021 deadline for requesting a first forbearance. There is no deadline for applying for an initial forbearance if you have a Fannie Mae or Freddie Mac loan.
Based on which federal loan agency backs your loan, the government provided the following relief:
- Fannie Mae and Freddie Mac-backed mortgages can be forbeared for up to 18 months at a time. Applicants must have received their initial forbearance on or before February 28, 2021. Otherwise, you are restricted to the one-year forbearance period listed above.
- You can request two additional three-month extensions if you apply for HUD/FHA, USDA, or VA forbearance on or before June 30, 2020. A total forbearance period of 12 months also applies if you don't comply.
- The Biden administration has extended the foreclosure moratorium for one more month until July 31, 2021. The forbearance enrollment period was also extended until Sept. 30, 2021.
With the aid of the Homeowner Assistance Fund established by the American Rescue Plan Act of 2021, states and territories can offer relief to struggling homeowners through their housing departments.
The lender typically discusses forbearance options with you if you have a private mortgage. When you contact them to explain your situation, if you have faced a hardship due to the pandemic, you may mention that the COVID-19 pandemic is to blame for your inability to meet your loan obligations.
What Happens After Forbearance Ends?
Upon the conclusion of the forbearance period, it is the borrower's responsibility to make up the delinquent payments. Sometimes the lender and borrower work together to get the borrower back on track. The borrower is not required to pay back the deferred payments in one lump sum if Freddie Mac owns the loan. The same may not be accurate for loans owned by other lenders.
Will Forbearance Affect Your Credit Rating?
Borrowers' credit ratings won't be negatively affected by forbearance. Nevertheless, missing payments before contacting the lender and setting up the forbearance terms is likely to impact negatively.
The CARES Act requires lenders to report forbearance assistance to credit bureaus for borrowers affected by COVID-19, but this will not decrease a borrower's credit score.
What Is Mortgage Forbearance?
Mortgage forbearance refers to when the company servicing your mortgage allows you to pause or reduce your mortgage payments for a specified period of time. It is essential to know that forbearance does not eliminate any of your payments; you are still responsible for missed or reduced payments.
Will Forbearance Affect Refinancing?
Forbearance prohibits you from refinancing. You will not be eligible to refinance with most institutions if you have not made mortgage payments. Individual circumstances and mortgage provider rules vary, however. Please discuss your situation with the mortgage provider.
How Do I Get Out of Forbearance?
As soon as the forbearance period ends, you must make up the money you missed. There are several options available. First, you will owe the entire amount in one go if you are reinstated. A repayment schedule allows you to bring your mortgage up to date over time, typically 12 months. It is a repayment plan you have agreed to with your mortgage servicer.
Can I Extend My Forbearance?
In most situations, you will be allowed to extend your forbearance. In general, extension periods range from 12 to 18 months but are subject to change based on the service provider.