Is Mortgage Forbearance a Good Idea?
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 stay in their homes. Some of these options are still available today, but many have expired now that the pandemic is no longer an official state of emergency.
What is mortgage forbearance
Mortgage forbearance lets you temporarily pause or lower your mortgage payments if you’re struggling financially. It’s a measure that lenders use to help you avoid foreclosure.
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.
Who it’s for: 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.
How long does mortgage forbearance last?
Forbearance typically lasts three to six months, and can often be extended out to one year if you continue to face financial difficulty.
What happens when mortgage forbearance ends?
That depends on the terms of your forbearance agreement. You’ll have to resume making your monthly mortgage payments no matter what, but in addition you may have to:
- Cover all of the payments you missed in one lump sum.
- Make larger monthly payments until the missed payments are fully repaid.
- Nothing until you either pay off your mortgage or sell the home, at which point you’ll have to repay the entire missed payment amount.
We’ll cover these options in more detail below.
Good news for FHA loan borrowers: COVID-19 forbearance options have been extended
Many forbearance options disappeared once the Coronavirus Aid, Relief, and Economic Security (CARES) Act expired in 2022. But there’s one significant exception: 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 February 2026.
Does mortgage forbearance affect your credit?
Forbearance can negatively affect your credit. That’s because, for the purposes of calculating your credit score, payments missed during the forbearance period are considered late payments — even if you’re meeting the terms of your forbearance agreement —
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.
Forbearance’s affect on your credit score is probably worth it
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. Plus, a foreclosure will stay on your credit report for seven years, whereas a missed payment can only affect your credit score for up to three years.
You might 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.
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. Where these four types differ is in how you’ll repay those missed payments once the forbearance period ends.
There are four types of forbearance:
- Reinstatement with suspended payments. 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.
Pros Cons 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
Will negatively affect your credit score if reported by your lender
Best if: You want total relief from mortgage payments for a short period of time, your financial hardship will be resolved at the end of the forbearance period and you’ll be able to pay off your missed payments immediately. - 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.
Pros Cons Lower payment for the set time period
Lower balloon payment due at the end of the forbearance
Reduced impact on your credit compared to a reinstatement plan with totally suspended paymentsBalance of reduced payments due at the end of the forbearance period
Interest accrues on the unpaid portion of the payments
Best if: You can continue to put some amount of money toward your mortgage payments, but can’t afford the entire amount. If you expect your financial hardship will be resolved at the end of the forbearance period, this type of forbearance allows you to pay off your missed payments immediately. - 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.
Pros Cons Lower or no payments for the set time period
No balloon payment at the end of the forbearance periodNew monthly mortgage payments are higher than your pre-forbearance payments
Interest accrues on missed payments
Best if: You don’t expect you’ll be able to afford to repay the missed payments all at once, even once you’ve been through a full forbearance period. - 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 you sell the home or pay off your loan and, in the meantime, won’t incur interest charges.
Pros Cons Gives you more time to pay back the missed payments
Interest won’t accrue on missed paymentsA balloon payment doesn’t provide a structured plan for paying off the missed payments over time
Best if: You can’t afford to pay anything over and above your regular mortgage payments right now.
How to apply for mortgage forbearance
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 with your lender.
Step 2: Confirm your eligibility
Both you and your property need to meet the eligibility requirements for forbearance. These requirements 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 the lender has offered you a mortgage forbearance agreement, it will 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 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. As we covered above, 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 financially.
If you’re not able to resume payments 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.
Alternatives to forbearance
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, so long as it approves 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 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 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
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 COVID-19 pandemic, it’s a little bit complicated exactly how. Previously, a forbearance generally meant you’d have to wait 12 months before getting a new mortgage. However, if your forbearance is part of a COVID-era program that was extended, it may not have affected your credit and may not mean you are 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.
As long as you’ve made the payments you committed to in your forbearance agreement and are back to making on-time mortgage payments, you shouldn’t have to wait more than three months.
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.