What Is Forbearance?

Forbearance is a temporary postponement of mortgage payments. It is a form of repayment relief granted by the lender or creditor in lieu of forcing a property into foreclosure. Loan owners and loan insurers may be willing to negotiate forbearance options because the losses generated by property foreclosure typically fall on them.

Key Takeaways

  • Forbearance is temporary postponement of mortgage payments granted by the lender or creditor in lieu of forcing a property into foreclosure.
  • The terms of a forbearance agreement are negotiated between the borrower and the lender.
  • The borrower must demonstrate the cause for repayment postponement, such as financial difficulties associated with a major illness or the loss of a job.
  • Fannie Mae and Freddie Mac are offering assistance for homeowners with a servicer-backed mortgage who are affected by COVID-19, the illness caused by the new coronavirus.

Understanding Forbearance

Forbearance provides the borrower time to repay delinquent mortgage sums. This is advantageous to the struggling borrower, but offering forbearance also benefits the loan owner, such as a bank, which frequently loses money on foreclosure after paying the fees associated with the process. However, loan servicers, which collect payments but do not own the loans, may be less willing to work with borrowers on forbearance relief because they do not bear as much financial risk.

Forbearance terms

The terms of a forbearance agreement are negotiated between the borrower and the lender. The opportunity for such an agreement depends on the likelihood that the borrower will be able to resume monthly mortgage repayments once the temporary forbearance is over. The lender may approve a full reduction of the borrower's payment or only a partial one, depending upon 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 grants the borrower a full moratorium on making mortgage payments for the forbearance period. Other times, the borrower is required to make interest payments but not pay down the principal. In still other cases, the borrower pays only part of the interest with the unpaid portion resulting in negative amortization. Another forbearance option is for the lender to reduce the borrower's interest rate on a temporary basis.

Will you receive forbearance?

Being awarded forbearance on a mortgage requires contacting the lender, explaining the situation, and receiving approval. Borrowers with a history of making payments on time are more likely to be granted this option. The borrower must also demonstrate the cause for repayment postponement, such as financial difficulties associated with a major illness or the loss of a job.

A borrower who worked the same job for 10 years and never missed a mortgage payment during that time, for example, is a good candidate to receive forbearance following a layoff, particularly if the borrower has in-demand skills and is likely to land a comparable job within weeks or months. Conversely, a lender is less likely to grant forbearance to a laid-off borrower with a spotty employment history or a track record of missing mortgage payments.

Special Considerations

Forbearance assistance is now being offered to mortgage borrowers affected by COVID-19, the illness caused by the novel coronavirus. On March 19, 2020, Governor Andrew Cuomo announced that New York mortgage servicers would be directed to provide 90-day relief to mortgage holders experiencing financial hardship. Fannie Mae is also offering assistance for affected homeowners with Fannie Mae-owned mortgages. Here are the Fannie Mae guidelines for single-family mortgages:

  • Homeowners who are adversely impacted by this national emergency may request mortgage assistance by contacting their mortgage servicer.
  • Foreclosure sales and evictions of borrowers are suspended until at least Aug. 31, 2020, based on June 17, 2020 guidance from FHFA.
  • Homeowners impacted by this national emergency are eligible for a forbearance plan to reduce or suspend their mortgage payments for up to 12 months.
  • Credit bureau reporting of past due payments of borrowers in a forbearance plan as a result of hardships attributable to this national emergency is suspended.
  • Homeowners in a forbearance plan will not incur late fees.
  • After forbearance, a servicer must work with the borrower on a permanent plan to help maintain or reduce monthly payment amounts as necessary, including a loan modification.

Homeowners can find out if they have a mortgage that is owned by Fannie Mae or call Fannie Mae at 1-800-232-6643 for more information.

Freddie Mac has announced similar actions to protect single-family homeowners with Freddie Mac-owned mortgages who are affected by COVID-19. Relief includes:

  • Ensuring payment relief by providing borrowers forbearance for up to 12 months.
  • Foreclosure sales and evictions of borrowers are suspended until at least Aug. 31, 2020, based on June 17, 2020 guidance from FHFA..
  • Waiving assessments of penalties or late fees against borrowers.
  • Suspending the reporting of delinquency related to forbearance, repayment, or trial plans to credit bureaus.
  • Allowing servicers to offer borrowers additional loss mitigation options that are typically only enacted to address natural disasters. This includes loan modifications that give servicers options to provide payment relief or keep the payment the same after the forbearance period.

Visit MyHomebyFreddieMac for more information and a mortgage look-up tool.