What is Mortgage Forbearance?

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Point of Interest

If you’re struggling to keep up with your mortgage payments, a forbearance agreement can add some much-needed relief by temporarily halting or reducing your payments.

Being under financial stress is hard, and having your home foreclosed on due to missed mortgage payments can make the matter so much worse. Thankfully, a mortgage forbearance can help stave off this outcome by temporarily halting or reducing your monthly payments.

Right now a global pandemic is rocking the economy in the U.S., and in turn, millions of homeowners are facing uncertain times. Given the current economic climate, the need for mortgage relief has skyrocketed.

Thankfully, the CARES act and other mortgage relief tactics, such as refinancing or loan modifications, are giving Americans options to manage their payments and avoid foreclosure.

Forbearance vs. loan modification vs. refinancing: What’s the difference?

Forbearance

For homeowners who are going through financial hardship, a forbearance agreement can help by temporarily halting or reducing mortgage payments for certain periods of time. The CARES act makes it possible to get a forbearance plan on certain types of mortgages for up to 360 days in total. It doesn’t cancel any amount owed, though, so any delayed payments will have to be paid off in full in the future.

Forbearances can help avoid foreclosures for people who are in serious financial binds. Late and missed payments can greatly damage your credit, so opting for a forbearance plan instead will not only provide much-needed payment relief, but it will also protect your credit score.

Loan modification

 Loan modifications allow a borrower to change their existing loan when they’re facing financial issues. You can change the interest rate, loan length, the type of interest rate, the amount of your payment or in some cases, even the total amount of the principal you owe. 

While forbearance is temporary, a loan modification is seen as a long-term solution for financial problems. Those issues typically stem from things like a permanent change in income (such as in the case of a death or divorce), a natural disaster, an illness or a disability.  

However, getting a loan modification is a bit time-consuming. You must prove to your current lender that you are or will soon face long-term financial issues. You’ll also have to be at least one loan payment behind to qualify, and you must meet the other requirements by your lender.

Refinancing

Refinancing a mortgage is when you reduce your monthly payments or total amount owed by replacing your current loan with a loan that has a lower or different type of interest rate or a different term length.

Unlike forbearance or loan modifications, refinancing a mortgage doesn’t have to be done through your current lender. You can shop around to find the best rate possible, giving you a lot of freedom and flexibility.

While refinancing is a good option for folks experiencing financial hardships, refinancing can be a good fit in most cases. If you can find a better rate, you may want to take it — but be aware that refinancing comes with new closing costs and other fees, so be sure to do the math before you decide. The amount you can save is often quite significant, but that isn’t always the case.

Forbearances during coronavirus

 Coronavirus has flipped the world on its head. Millions of Americans are out of work and are struggling to keep up with their mortgage payments. In response, the government passed the CARES act, a mortgage relief program aimed at allowing homeowners to enter a period of forbearance without accumulating any credit consequences.

The CARES Act provides this relief a few ways. Homeowners are eligible for forbearance for up to 180 days (6 months). Plus, you can request an additional extension for another 180 days — giving you almost an entire year of forbearance.

There is a catch, though. The CARES Act only applies to mortgages that are backed by the federal government. Only loans listed below are eligible for these benefits.

  • Fannie Mae
  • Freddie Mac
  • USDA
  • FHA
  • VA

If your loan isn’t covered by the CARES Act, there still may be some mortgage relief programs at your disposal. You should contact your loan provider to see what options are available to you.

A record number of Americans missed mortgage payments back in May 2020 — early on in the Coronavirus pandemic — igniting fears that another collapse akin to the 2008 mortgage crisis is near.

While delinquencies and missed payments are occurring due to the pandemic, the coronavirus situation is completely different than those that led up to 2008. Additionally, there are a number of actions by local governments that go beyond the CARES act to help avoid this outcome.

Still, you can expect some of the same trends to occur during COVID that occurred in 2008. There has actually been an uptick in home purchases and prices across much of the country, but if mass foreclosures are allowed to occur along with a decrease in demand, it will sharply decrease the valuation of homes across America. What this will mean for homeowners is that the mortgages they own will far exceed the value of their homes.

Keep in mind, though, that there are simply too many unknowns right now — both with the economy and the pandemic — to say definitively which way the market will go. 

 How to refinance after forbearance

 The good news for homeowners who entered into forbearance during COVID is that there are plenty of options available to you to refinance with a great rate after your forbearance ends.

In normal times, refinancing after a forbearance is tricky. Due to the pandemic, though, the requirements have been modified to allow homeowners in forbearance to still refinance after the forbearance period is over. 

Homeowners who were in forbearance due to the pandemic can request refinancing after making just three consecutive on-time payments in the post-forbearance months.

If you are eligible to refinance (or you think you might be soon) contact the holder of your mortgage to discover the rates you can get — which are some of the lowest mortgage rates in years.

The final word

If you’re a homeowner experiencing money problems due to the pandemic or otherwise, you should look at forbearance if you fear that your monthly mortgage payments will be hard to make in the near future. Be aware, though, that even with the government’s additional provisions, a mortgage forbearance is just temporary relief. If you’re seeking a more permanent solution, then refinancing or a loan modification might be a better fit.

Evan Manwell

Evan Manwell is a personal finance writer based out of Portland Oregon. He has worked closely with both banks and credit unions to write about personal loans, credit cards, student loans, cryptocurrencies, and advances in fintech.