Forbearance: Meaning, Who Qualifies, Examples and FAQs

What Is Forbearance?

The term forbearance refers to the temporary postponement of loan payments, typically for a mortgage or student loan. Lenders and other creditors grant forbearance as an alternative to forcing a property into foreclosure or leaving the borrower to default on the loan.

The companies that hold loans and their insurers are often willing to negotiate forbearance agreements because the losses caused by foreclosures or defaults typically fall on them.

Understanding Forbearance

Although it is primarily used for student loans and mortgages, forbearance is an option for any loan. It gives the debtor extra time to repay what they owe. This helps struggling borrowers and benefits the lender, who frequently loses money on foreclosures and defaults after paying the fees. Loan servicers (those that collect payments but do not own loans) may be less willing to work with borrowers on forbearance relief because they do not bear as much financial risk.

The terms of a forbearance agreement are negotiated between borrowers and lenders. The chances of getting an arrangement depend partly on the likelihood that the borrower will be able to resume monthly payments once the forbearance period is over. The lender may approve a total reduction of the borrower’s payment or only a partial reduction, depending on the extent of the borrower’s need and the lender’s confidence in the borrower’s ability to catch up at a later date.

In some cases, the lender may grant the borrower one of several options. These include:

• A full moratorium on making payments for some time
• Requiring the borrower to make interest payments but not pay down the principal
• The borrower pays only part of the interest, with the unpaid portion added to their total debt—a process known as negative amortization

Forbearance may be mandated by law. For example, the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was passed and signed into law in 2020 to address the economic fallout from COVID-19, included provisions for student loan forbearance.

Some state governments also enacted regulations related to forbearance during the pandemic. The law also made provisions for mortgage payment forbearance for struggling homeowners during the pandemic. More information on these updates is detailed below.

How to Apply for Forbearance

Borrowers should contact their lenders or loan servicers to apply for forbearance on student loans or mortgages. In most cases, they will need to demonstrate a need to put off payments, such as financial difficulties associated with a significant illness or job loss.

Since forbearance agreements are negotiated, lenders have a lot of discretion when it comes to deciding whether or not to offer help and to what extent they do. Borrowers with a consistent payment history are more likely to be successful.

For example, a borrower who worked at the same company for ten years without ever missing a mortgage payment is a good candidate following a layoff. This borrower would be particularly likely to receive forbearance if they are highly skilled and can land a comparable job within a reasonable period. A lender is less likely to grant forbearance to a laid-off borrower with a spotty employment history or a track record of missed payments.

COVID-19 Forbearance for Student Loans

Forbearance assistance became part of COVID-19 legislation and administrative actions in March 2020, starting with the announcement that the U.S. Department of Education’s Federal Student Aid office would suspend loan payments, set interest rates to 0%, and stop collections on defaulted loans.

This forbearance program is a temporary exception, providing for federal student loan debt forgiveness in response to the COVID-19 pandemic and a campaign promise of President Biden. In that case, borrowers with eligible loans were automatically placed in administrative forbearance and not required to make monthly loan payments until the program comes to an end, which is scheduled for 60 days after June 30, 2023, or 60 days after pending litigation against the White House's student loan forgiveness program is resolved, whichever is earlier.

In March 2021, the Department of Education announced that all defaulted Federal Family Education Loan (FFEL) Program loans made by private lenders would also be granted forbearance as part of COVID-19 relief.

Although private student loans do not qualify for forbearance under COVID-19 laws, some private lenders may offer some form of forbearance on their own.

COVID-19 Forbearance for Mortgages

Mortgage forbearance assistance was extended to consumers as part of the CARES Act. COVID-19 mortgage forbearance applies to all federally backed and federally sponsored mortgages. This includes loans backed by the following:

• U.S. Department of Housing and Urban Development (HUD)
• Federal Housing Administration (FHA)
• U.S. Department of Agriculture (USDA)
• U.S. Department of Veterans Affairs (VA)
• Fannie Mae
• Freddie Mac

The law provides for up to 180 days of initial forbearance with an additional 180-day extension.

If your loan is backed by HUD/FHA, the USDA, or the VA, then the deadline for requesting an initial forbearance has been extended until when the COVID-19 National Emergency ends. If your loan is backed by Fannie Mae or Freddie Mac, then there is no deadline to apply for an initial forbearance.

The government has implemented updates that provide the following relief, depending on which agency backs your federal loan:

• If your mortgage is backed by Fannie Mae or Freddie Mac, you may request up to two additional three-month extensions for up to 18 months of total forbearance. To qualify, you must have received your initial forbearance on or before Feb. 28, 2021. Otherwise, you are limited to the one-year forbearance period mentioned above.
• If your mortgage is backed by HUD/FHA, the USDA, or the VA, and you received your initial forbearance on or before June 30, 2020, you can request up to two additional three-month extensions. If not, you are also limited to total forbearance of 12 months.
• In April 2022, the Biden administration extended the foreclosure moratorium through Aug. 31, 2022.

The Homeowner Assistance Fund established by the American Rescue Plan Act of 2021 provides nearly $10 billion for states and territories to offer relief to struggling homeowners through their housing departments.

What Happens After Forbearance Ends?

Once the forbearance period is over, the borrower is responsible for making up the delinquent payments. The lender often works with the borrower to come up with a plan to catch up on the owed debt. If the loan is owned by Freddie Mac, the borrower is never required to pay back the deferred payments in a lump sum. Keep in mind that this may not be the case with other lenders.

Again, depending on the terms negotiated with the lender, the borrower may owe interest that has accrued during the forbearance period, in addition to possible late fees.

Will Forbearance Affect Your Credit Rating?

Forbearance will not adversely affect a borrower’s credit rating. However, missing payments before contacting the lender and setting up the forbearance terms most likely will have a negative impact.

Forbearance assistance offered to mortgage borrowers affected by COVID-19 is reported by lenders to credit bureaus as required by the CARES Act, but it will not cause the borrower’s credit score to go down.

The Bottom Line

Forbearance is a temporary suspension of loan payments that normally lasts for a set period of time, typically in reference to student loans or mortgages. It does not mean that you stop paying your loan entirely, but rather it delays your payments. It is important to know that being granted a reprieve from paying a mortgage will not erase all of your debt; you will still need to pay the amount that was past due at the time of the grant of the reprieve as well as any interest that may have accrued during the suspension.

In addition, at the end of the grace period you will once again have to pay the full amount that was due on your mortgage when you started the suspension. If you are unable to pay your loan after this temporary suspension, it will likely only make your situation worse in the future. It may be beneficial to contact your lender to discuss the possibility of refinancing your loan so you can lower your monthly payments and keep your home.