What happens to a mortgage if the homeowner hits a snag and can’t pay? Thankfully, sudden hardships — such as temporary unemployment or health issues — do not necessarily lead to credit damage or foreclosure.
Some mortgage servicers allow borrowers with unforeseen financial troubles to trim or pause mortgage payments short term through mortgage forbearance. The goal is to give the borrower a chance to become more financially stable.
Identifying Your Loan Servicer
If you want to ask if mortgage forbearance is an option, determine your mortgage servicer, which may not be the lender that originally provided the loan.
The name of the servicer typically appears on the bill that arrives in the mail or on the website where mortgage payments are made. You could also try the MERS® website .
Those who think they may have Fannie Mae or Freddie Mac-owned loans can check online as well.
What Does Mortgage Forbearance Really Mean and How Does It Work?
First things first: If rough seas are rising around you, it doesn’t make much sense to wait to ask for a lifeline. During forbearance, interest is not paid but accrues and is later added to the loan balance. All suspended payments also will need to be paid back.
Similarly, if you’re experiencing a hardship, before missing even one mortgage payment, it would be smart to contact your servicer to ask about options, go over the details, and formalize an agreement. Forbearance is often only granted after a financial review to gauge the likelihood that you can resume regular payments at the end of the forbearance period.
It’s important to ask whether skipped payments are expected to be paid in a lump sum when the forbearance ends, paid in installments, or added to the end of the loan term.
Do You Have to Pay Extra Interest for Forbearance?
Typically no. The interest rate and amount of interest follow the loan agreement.
The loan interest might change only if the lender extends the loan term or increases the loan interest rate.
Pros and Cons of Mortgage Forbearance
|It’s a chance to avoid foreclosure||Often higher monthly payments after forbearance|
|Usually has no impact on credit||You normally have to prove hardship|
|Good for short-term hardships||Interest accrues|
|Missed payments must be repaid|
Federally Backed and Private Mortgage Options
Under the CARES Act, borrowers with conventional, FHA, USDA, or VA loans could request mortgage forbearance for six months, and then a six-month extension, for Covid-related hardships. The deadline for an initial hardship application for federally backed loans was extended yet again, into 2022. At that time, no deadline for requesting an initial Covid hardship forbearance was apparent for loans backed by Fannie Mae or Freddie Mac.
Whether you have a conventional home loan or government-insured home loan and you’re experiencing hardship, again, it’s important to contact your loan servicer as soon as possible to discuss options and the exact terms of each.
With coronavirus-related requests, most mortgage lenders do not require proof of hardship other than verbal or written verification.
But in general, lenders ask for documentation to prove the hardship, including current monthly income and expenses. They also will want to know whether your hardship is expected to last six months or less (short term) or 12 months (long term).
Depending on the lender, you may need to call to discuss options or might be able to start the forbearance request process online.
Coming Out of Forbearance
When a forbearance period ends, how will the amount that was paused be repaid? The answer depends on the lender and type of loan.
• It’s possible that the sum unpaid during the forbearance period will be due in full once a loan is out of forbearance.
• That is not true with a Fannie Mae, Freddie Mac, FHA, USDA, or VA loan. With these loans, the amount that was suspended will not be required to be paid back in a lump sum.
• Other lenders may extend the loan period, adding the forbearance dollars to the end of the loan.
• Yet other lenders may raise monthly payments once a loan is out of forbearance to make up the amount that wasn’t being paid during the mortgage forbearance period.
Deferred Mortgage Payments and Credit Scores
Even one missed mortgage payment will dent your credit scores, and late payments will stay on your credit history for seven years.
Forbearance, on the other hand, usually does not show up on credit reports as negative activity.
Alternatives to Mortgage Forbearance
For those who can’t afford to pay their mortgage, options like these may be available.
Mortgage Loan Modification
If you cannot refinance, loan modification is an option. Loan modification changes the original terms of your mortgage long term or permanently. The point is to make your payments more manageable, usually with a lower interest rate, a longer loan term, or both.
If the length of the loan is extended, you’ll probably pay less per month than before but pay more interest over the life of the loan.
When reaching out to your loan servicer to discuss loan modification, you might want to ask about any fees for the modification; what the new repayment term, rate, and payments will be; and whether the modification is temporary or permanent.
Financial evidence of hardship and a letter will be required.
A federal mortgage relief plan for homeowners affected by Covid-19 and exiting forbearance allows, as of 2021, modification of eligible FHA, VA, and USDA loans, reducing monthly payments by 20% to 25%.
The Federal Housing Finance Agency has similar options for conventional conforming loans (non-government-backed loans that conform to loan limits). Not among conforming loans: jumbo loans.
Refinancing a mortgage is altogether different from modifying a home loan. When refinancing a mortgage loan, you’re applying for a brand-new loan that would then be used to pay off outstanding home debt.
You might qualify for a lower interest rate or get a longer loan term. Closing costs apply.
If you’re struggling financially, it might be difficult to qualify for refinancing, but it doesn’t hurt to get pre-qualified, which takes mere minutes. You may find that you’re eligible for a refinance during or after forbearance, according to Fannie Mae.
Draw on Savings
In an emergency, you may want to consider tapping your emergency fund.
If you have a Roth IRA, remember that you can withdraw contributions at any time tax- and penalty-free.
You may qualify for a hardship distribution from a 401(k) and permanently withdraw money if your plan allows it. Your employer will likely deduct 20% upfront for taxes. The 10% penalty tax is waived if the hardship withdrawal is for a handful of specific reasons.
Sell Your Home
If the weight of mortgage payments becomes too much, you could sell your house and pay off the mortgage.
If the proceeds would fall short, an option is a short sale. Your lender decides whether to OK the sale or whether to work out a plan, like allowing you to make interest-only payments for a set amount of time or extending the loan term.
Another option is filing for Chapter 13 bankruptcy to stave off foreclosure.
Chapter 13 allows a borrower up to five years to pay missed mortgage payments. So instead of having to make one giant payment, if that’s what is being asked for, a homeowner could break up the payments over 60 months.
If, for example, a homeowner accepted a 12-month forbearance on monthly payments of $2,400, a Chapter 13 plan could allow the $28,800 in arrears to be paid over 60 months.
Other debts can be restructured and possibly discharged under Chapter 13.
Mortgage forbearance allows paused or reduced payments for borrowers experiencing a sudden hardship that is expected to last six months or less. It’s one way to ward off foreclosure.
If refinancing your mortgage could help, get pre-qualified with SoFi. It’s quick and easy to get your rate.
Does forbearance hurt credit?
No, if you abide by all the terms of the agreement. Skipped payments during a forbearance period are typically not reported to the credit bureaus.
Is mortgage forbearance a good idea?
If the financial hardship is short term, forbearance could provide a welcome respite until you get back on your feet. And it sure beats foreclosure.
Does forbearance affect getting a new mortgage?
It depends. For Fannie Mae- and Freddie Mac-backed loans, if you paid everything back in a lump sum after forbearance, you can proceed. If not, you will need to make three consecutive payments under your repayment plan or payment deferral option.
FHA loans have a waiting period that varies by loan type if you’ve missed any payment in forbearance, even if you paid everything back in a lump sum.
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