What is mortgage forbearance? How it works and when it helps

Forbearance is an agreement you can make with your lender to temporarily pause your monthly payments for a specified amount of time, due to financial hardship.

Forbearance can be offered on different loan types, including student loans, auto loans, or mortgages. For the purposes of this article, we’ll focus specifically on forbearance for mortgage loans.

Mortgage forbearance allows you to stay in your home and pause payments if you are experiencing a financial hardship, such as job loss. Forbearance helps you avoid late fee penalties on missed payments and avoid foreclosure. It is important to note that forbearance does not waive or reduce your overall monthly payments.

There are two common types of mortgage forbearance, but there could potentially be others based on your lender:

• Unemployment – If you’re encountering a temporary hardship after losing your job, you can temporarily pause or reduce your mortgage payments to prevent late fees.
• Disaster – If a natural disaster impacts your ability to pay your mortgage, contact your lender about a temporary relief period for your mortgage payments.

Typically, mortgage forbearance lasts no longer than a year, but your lender will work with you to create a timeline that works for both of you. Consult your lender for timing and logistics, including how you’ll make up payments that would have occurred during the forbearance period.

When you resume your mortgage payments, you are responsible for paying back the outstanding balance from the forbearance period, including interest. You don’t always have to pay this amount back all at once, depending on the forbearance plan you establish with your lender.

The two common forms of repayment after forbearance ends are:

• Reinstatement – You would be responsible for repaying one lump sum to make up the payments missed during forbearance. 
• Recurring repayment plans – Your lender may agree to set up recurring repayments, often by adding them to your regular monthly payment. This means your monthly payments may increase.

If your financial hardship is lasting longer than you anticipated, you can pursue a loan modification to change your loan terms. Some lenders may require you to go through forbearance first before granting a loan modification. Talk to your lender about their eligibility requirements.

Mortgage forbearance could negatively impact your credit score, but it depends on how your lender reports forbearance to credit bureaus.

• Potential negative impact – Forbearance shows there was a period when you weren’t making mortgage payments, which could negatively impact your credit score or create higher interest rates on future loans.
• Impact is smaller compared to other options – While forbearance could negatively impact your credit, being delinquent on your loan or having your home go through foreclosure would have a more significant negative impact on your credit score.
• Paid as agreed – Some lenders may categorize mortgage forbearance as “paid as agreed,” which would not affect your credit score. However, not all lenders do this, since forbearance is a special circumstance that was not part of your original loan terms.

Mortgage forbearance could be an option to explore if you are experiencing financial hardship and need formal assistance, but it may not be right for all borrowers.

• Understand the impact – While forbearance may help you navigate difficult financial circumstances, be sure to understand how your credit score will be affected and what is expected of you after forbearance is over.
• Know your options – Some borrowers may choose to pursue less formal options, like changing their spending habits, to meet their monthly payments. Talk with your lender to understand what’s available and to determine if mortgage forbearance works for you.

In some scenarios, borrowers may choose to defer their payments to provide temporary relief. If you defer your monthly payments with your lender, your payments are paused, and the paused payments are added to the end of your mortgage.

However, deferment may extend your overall loan term depending on your agreement, often without significantly changing your monthly payment amount. With forbearance, repayment outcomes can vary. In some cases, your loan term may stay the same, and your monthly payments could increase, depending on how the missed payments are repaid. 

Every lender has different qualifications for mortgage forbearance. If you and your lender agree to forbearance, they may request documentation that speaks to your financial situation, including:

• Your proof of income and take-home pay
• A breakdown of your recurring monthly expenses
• Information about the timing of your financial hardship
• Unemployment benefits, if you have lost your job

In general, it's best to start the mortgage forbearance process early rather than waiting until you’ve missed a payment. A missed payment can show up as a delinquency on your credit report and could negatively affect your credit score.

Follow these steps to start the mortgage forbearance process:

• Contact your mortgage servicer – Discuss your situation with them and learn what options are available.
• Discover if you qualify for mortgage forbearance – Every lender’s qualifications will vary, but you will likely have to show proof of your income, expenses, and financial hardship.
• Work together to create an agreement – Work with your lender to create your forbearance plan that answers the following questions:
• How long will forbearance last?
• What is expected from you during the forbearance period?
• How will forbearance be reported to credit bureaus?
• What will repayment look like once forbearance ends?

Mortgage forbearance may be worth pursuing if your monthly budget cannot cover your mortgage payments. However, if you can change your spending or savings habits to make your budget work, there will be little or no impact on your credit. If you anticipate that your financial situation has significantly changed and will impact your monthly budget, talk with your lender about mortgage relief offers.

At Wells Fargo, we work with existing customers on forbearance at no additional cost. You can explore potential mortgage assistance options.

You can also access free assistance for forbearance through HUD-approved housing counseling agencies. Counselors at these agencies can help you negotiate with your lender and work with you to understand your budget and your options at little or no cost. You can find a counselor through the CFPB website or by calling 1-855-411-2372.