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.
As a result of the COVID-19 pandemic, borrowers have new options for obtaining forbearance, although those are likely to expire in the future.
- Forbearance is a temporary postponement of loan payments granted by a lender instead of forcing the borrower into foreclosure or default.
- The terms of a forbearance agreement are negotiated between the borrower and the lender.
- The borrower must demonstrate the need for postponing payments, such as financial difficulties brought on by a major illness or the loss of a job.
- Mortgagors whose loans are backed by government programs and are affected by COVID-19 may qualify for relief.
- Forbearance is available for federal student loans for borrowers affected by COVID-19 until Jan. 31, 2022.
How Does Forbearance Work?
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 a period of time
- requiring the borrower to make interest payments but not pay down the principal
- the borrower paying 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.
Receiving forbearance doesn't relieve you of your financial responsibility, which means you must still make up for the missed payments once your agreement ends.
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 if 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 10 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 of time. 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.
The special government program described below is a temporary exception, providing for federal student loan forbearance in response to the COVID-19 pandemic. 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, currently scheduled for Jan. 31, 2022.
COVID-19 Forbearance for Student Loans
Forbearance assistance became part of COVID-19 legislation and administrative actions since March 2020, starting with the announcement that the U.S. Department of Education’s Federal Student Aid office would grant 60-day student loan forbearance to any federal student loan borrower who requested it. Subsequent legislative action extended the payment pause for all Department of Education-owned student loans to Jan. 31, 2022.
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.
Another forbearance option is for the lender to temporarily reduce the borrower’s interest rate.
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:
- 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 is currently Sept. 30, 2021. If your loan is backed by Fannie Mae or Freddie Mac, then there is no deadline to apply for an initial forbearance.
The government made updates, providing 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.
- On June 24, 2021, the Biden administration extended the foreclosure moratorium for a final, additional month until July 31, 2021. In addition, the forbearance enrollment window was extended through Sept. 30, 2021.
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.
Many private mortgages have forbearance options, and lenders are generally required to discuss them with you. If you contact them to explain your circumstances, make sure to mention that your inability to meet your obligation is due to the COVID-19 pandemic.
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, as well as 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.
What Is Mortgage Forbearance?
Mortgage forbearance is when the company that services your mortgage permits you to pause or reduce your monthly mortgage payments for a specific period of time. It's important to know that forbearance doesn't eliminate any of your payments; you will still owe any missed or reduced payments.
Will Forbearance Affect Refinancing?
Yes, if you are in forbearance you are not allowed to refinance. The specific point is that any missed mortgage payments will prevent you from being eligible for refinancing with most institutions. Each individual, however, has different circumstances and each mortgage provider has different rules. It is important to check with mortgage providers what your situation would be.
How Do I Get Out of Forbearance?
Once your forbearance period ends, you owe the amount of money that you missed. There are different options that you can choose from. Reinstatement means that you will owe the entire amount all at once. Repayment allows you to bring your mortgage up to date over time; usually 12 months. This is a repayment plan that you have agreed to with your mortgage servicer.
Can I Extend My Forbearance?
Yes, in most situations you will be allowed to extend your forbearance. Extension periods are usually 12 months to 18 months but can vary depending on the service provider.