Is mortgage forbearance a good idea?

Whether you got laid off, have an unexpected medical expense, or your home was damaged by a storm, your mortgage can go from being affordable to a bill you struggle to meet.

Forbearance is a smart choice when you can't make your monthly mortgage payments. However, you must repay the money you didn't pay once forbearance ends. Should you use mortgage forbearance? Let's look at how it works and if it may be right for you.

Mortgage forbearance: A quick overview

Forbearance is when you contact your mortgage servicer, and they agree to let you skip your mortgage payments or make lower payments for a set period. If you're going through financial hardship, your mortgage servicer may offer forbearance to avoid foreclosing on your home.

Financial hardships can include losing your job, decreased income, illness, the death of a family member who helped pay your mortgage, or damage from a natural disaster.

Your loan is not forgiven when you use mortgage forbearance, and interest continues to accrue on your balance during this time.

How it works

Call your mortgage servicer to explain your financial situation and ask for help staying current on your loan. The servicer is the company that handles mortgage servicing tasks like collecting payments and managing escrow. They may not be the lender that originally made your loan, and your loan may have transferred multiple times from the original lender.

If you're approved, your servicer sets the terms of your agreement:

• Payment relief. Your payments could be fully paused or temporarily reduced.
• Forbearance period. How long the relief lasts. For loans backed by Fannie Mae and Freddie Mac, forbearance is typically granted in increments of up to three months, with a 12-month cap. FHA, VA, USDA, and privately held loans follow their own rules, so your loan type matters in determining what relief is available.
• Interest. In most cases, interest continues to accrue on your balance while payments are paused.
• Repayment options. How and when you'll pay back what you skipped.
• Credit reporting. How the servicer will report your account to the credit bureaus during forbearance.

Even if you are allowed to pause mortgage payments or pay a reduced amount, you must still make your property tax and home insurance payments. If you have an escrow account, your mortgage servicer may pay these and add them to your missed payments.

Don't stop making payments until you have your forbearance agreement in writing. If you miss a payment before you are granted forbearance, it may be reported as a late payment, which could impact your credit and make you ineligible for the program you're applying for.

Requirements

Each mortgage servicer has different requirements to grant forbearance on your mortgage. Most require documentation showing you're experiencing financial hardship. These documents may include:

• Proof of hardship. Documents such as a layoff notice, medical bills, a disability claim, or an insurance claim for property damage.
• Income and expenses. Your current take-home pay, any unemployment benefits, and an itemized list of monthly household expenses.
• A timeline. Why the hardship is temporary and when you expect to resume full payments.

Tell your mortgage servicer how long you expect your financial hardship to last and when you can resume full payments. Some mortgage servicers may require you to reach out within a certain amount of time if a natural disaster damages your home.

What happens when mortgage forbearance ends?

When your mortgage forbearance ends, you will resume regular mortgage payments and must repay the missed payments. You have a few options to repay what you missed.

• Lump sum payment. You pay the entire past-due balance at once. This brings your loan current immediately, but it's an unlikely scenario for borrowers facing financial hardship.
• Repayment plan. The missed amount is spread over a set number of months and added to your regular payment until you're caught up.
• Payment deferral. Missed payments move to a separate balance that's due when you sell, refinance, or pay off the mortgage. Your regular payment stays the same.
• Loan modification. If your income hasn't fully recovered, your servicer may permanently change your loan terms, such as extending the repayment period or adjusting the rate, to make payments more affordable.

If none of them are realistic, HUD-approved housing counselors can help you review your options at little or no cost.

Is mortgage forbearance a good idea?

Mortgage forbearance can be a good option if you can't make your mortgage payments and know when you can start paying again. It can help you stay in your home during a financial hardship and get back on track with your payments.

Mortgage forbearance is not a permanent solution for not being able to make your mortgage payments. If your income has decreased, talk with your mortgage servicer about other options or consider selling your home and downsizing to a smaller mortgage or start renting.

Pros of mortgage forbearance

Immediate payment relief

Pausing or reducing your payments frees up cash for groceries, utilities, and other essentials while you deal with a job loss, medical issue, or home repair.

Helps you avoid foreclosure

Falling behind without an agreement in place can eventually lead to foreclosure. Forbearance keeps you in good standing with your servicer as long as you follow the terms.

Can protect your credit

If your account was current when forbearance started, and you follow the agreement, your servicer generally won't report the paused payments as late. Talk with your lender before missing a payment to avoid negative marks on your credit.

Multiple ways to catch up

Between repayment options, deferrals, and loan modifications, many homeowners avoid repaying the missed payments in one lump sum.

Cons of mortgage forbearance

You still owe the full amount

Forbearance delays payments, but it doesn't eliminate them. The amount you owe stays the same and may grow as interest continues to accrue, and escrow advances are added.

Interest continues to accrue

In most cases, interest continues to build during forbearance. The longer it takes to get current, the more it can cost you.

Higher payments or a big bill later

A repayment plan raises your monthly payment until you're caught up. If you're already struggling with your mortgage payment, a higher payment may be even more unaffordable. Paying a lump sum to bring your loan current can strain your finances just as you're recovering.

It may show up on your credit report

Even if your servicer reports your account as current, it may note that your loan is in forbearance. Future lenders can see this when reviewing your credit report.

It can delay refinancing

Most lenders won't approve a refinance or new mortgage during active forbearance. Some lenders require several on-time payments after it ends before they'll consider lending to you.

Approval isn't guaranteed

If you're already significantly behind or can't show a temporary hardship, they may deny your request.

When mortgage forbearance might make sense

Mortgage forbearance makes sense if your hardship is short-term and you know when you'll be able to start making your full mortgage payment. Here are some scenarios where using mortgage forbearance may be the right option for you.

Alternatives to mortgage forbearance

Forbearance isn't the only way through a financial hardship. Depending on your situation, one of these alternatives may be a better fit.

Loan modification

If you can't make your mortgage payments because your income has permanently decreased, you may want to speak with your mortgage servicer about modifying your loan. A loan modification can change your loan terms to help you make your payments.

Refinancing

If you still have a stable income and good credit, you may want to refinance your mortgage. By extending your loan term, you can lower your monthly payment. Just remember you will have to pay closing costs and may have a higher interest rate than your current loan.

Tapping your home equity

If you have built up equity in your home, you can use it to make your mortgage payments or catch up on missed payments. Here are some ways to get equity out of your home:

• Home equity line of credit (HELOC). A flexible line of credit with interest-only payments during the draw period. Most lenders require stable income and good credit, which can be hard to show after a job loss.
• Home equity loan. A lump sum with a fixed rate and payment. It has similar qualification hurdles and adds another monthly bill.
• Home equity investment (HEI). An HEI provides a lump sum in exchange for a share of your home's future appreciation. No monthly payments, no income requirements, and no need for perfect credit can make it a good fit after an income drop. You can settle the investment anytime during the flexible 30-year term, often when you sell or refinance.

Selling or downsizing

If you know you can't afford your home anymore, selling and moving to a cheaper location can help you keep your equity. Selling avoids losing your home to foreclosure, which can also harm your credit and make it harder to buy another home or get approved for a lease.

Mortgage forbearance can help you if you can't make your mortgage payments. But it won't decrease your loan balance, and you may end up paying more in interest. If you have a large amount of equity in your home, you may want to look into other options before using mortgage forbearance.