Understanding Mortgage Forbearance: A Comprehensive Guide

Mortgage forbearance is a temporary suspension or reduction of monthly mortgage payments granted by a lender to help a borrower through a period of financial hardship. This relief can be a lifeline for homeowners facing unexpected financial challenges. At O1ne Mortgage, we understand the complexities of mortgage forbearance and are here to guide you through the process. If you need assistance, don’t hesitate to call us at 213-732-3074.

How Does Mortgage Forbearance Work?

To receive mortgage forbearance, you must request it from your lender. Lenders offer forbearance at their discretion, expecting that regular payments will resume within a short time, typically no more than 12 months. The payments put on hold during the forbearance period will need to be repaid with interest.

When forbearance ends, lenders typically expect repayment in one of the following ways:

• Lump-sum payment: Covers the portion of your regular payments you didn’t make during the forbearance period.
• Repayment in installments: Added to your standard monthly mortgage payment for up to 12 months.
• Deferral of payments: Added to the end of your payment term, potentially resulting in significant additional interest charges.
• Mortgage modification: Permanently alters your interest rate and/or the length of your payment term to make your monthly payments more affordable.

Except under extraordinary circumstances, such as the COVID-19 pandemic, forbearance is a courtesy. Lenders are not obliged to offer it and typically limit it to borrowers with good credit who can show that their financial difficulties will be short-lived.

Pros and Cons of Mortgage Forbearance

There are distinct benefits and disadvantages to mortgage forbearance:

Pros

• Avoid selling your house: Mortgage forbearance can help you get through a short-term reduction in income or increase in expenses without having to sell your house or fall behind on mortgage payments.
• Reduce stress: Reduced or suspended mortgage payments during a time of temporary financial crisis can reduce the stress of coping with job loss, personal loss, or disaster recovery.
• Preserve your credit score: If your lender agrees not to report your loan status as “not paid as agreed” during your forbearance period, there will be no negative impact on your credit scores.

Cons

• Hard to get: If you have less-than-ideal credit, your lender could deny your request for mortgage forbearance.
• Increased payments later: The transition from the forbearance period to the repayment phase can be challenging to your household budget.
• Foreclosure: If you are unable to make scheduled reduced payments during the forbearance period or repay suspended or partial payments according to the terms of your forbearance agreement, the lender can foreclose on your home.

Is Mortgage Forbearance Bad for Your Credit?

That depends. Even though it is given with the lender’s permission, mortgage forbearance technically deviates from the terms of your mortgage contract. The lender can report your loan as “not paid as agreed” to the national credit bureaus, which would result in a negative entry on your credit report.

Lenders do not have to report forbearance to the credit bureaus, however, and some do not. Before entering into a forbearance agreement, it’s wise to know your lender’s policy on this—and it’s OK to ask them not to report a change in payment status to the credit bureaus.

Is Mortgage Forbearance a Good Idea?

If you are experiencing financial challenges, such as loss of income or increased expenses, and you are confident they will be temporary, mortgage forbearance can be a great way to ease the pressure on your budget without putting your home at risk. If your loan servicer agrees not to report a change in payment status to the credit bureaus, it can even allow you to keep your credit intact.

If, however, you cannot realistically commit to resuming regular mortgage payments within 12 to 18 months or less—and at least starting to repay all of what you would have paid during the forbearance period at that time—mortgage forbearance probably isn’t a good option. If that’s the case, or if your mortgage lender denies your forbearance request for any reason, consider consulting a government-approved housing counselor to help sort out your best options.

How to Qualify for Mortgage Forbearance

The only way to know whether you’ll qualify for mortgage forbearance is to ask your lender or loan servicer. Just as mortgage lenders set their own criteria for loan approval, each has its own standards for deciding to whom it will extend mortgage forbearance. Factors could include your credit history, credit scores, and evidence you can provide to show that your hardship will be temporary and that you’ll have the means to make repayment after the forbearance period ends.

FAQs About Mortgage Forbearance

How Long Does Forbearance Last?

Forbearance typically lasts no more than 12 months, but the exact duration can vary depending on the lender and the borrower’s situation.

What Are Alternatives to Mortgage Forbearance?

Alternatives to mortgage forbearance include loan modification, refinancing, or selling the property. Consulting with a housing counselor can help you explore these options.

Is Extra Interest Charged During Forbearance?

Yes, interest continues to accrue on the unpaid portion of your mortgage during the forbearance period, which can result in higher overall costs.

The Bottom Line

If you are experiencing a temporary financial hardship and are confident you’ll be able to resume regular mortgage payments in a year or less, mortgage forbearance could be a great option for getting you through the crisis. As you navigate your hardship, it’s a good idea to keep an eye on your credit. If your lender agreed not to report payments as late or missed, checking your credit report can ensure they keep their promise.

At O1ne Mortgage, we are committed to helping you find the best solutions for your mortgage needs. If you have any questions or need assistance with mortgage forbearance, call us at 213-732-3074. Our team of experts is here to help you every step of the way.