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Forbearance: What You Need To Know

Carey Chesney4-minute read

September 18, 2020

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Let’s be honest, times are tough for many Americans. The global pandemic we all face affects our lives in so many ways, often including new and unwelcome financial issues. If COVID-19 is hitting your budget hard, Rocket Mortgage® has some options. Check out their COVID-19 Resources guide, mortgage assistance info and COVID-19 FAQ to see how they can help. Whether it's medical hardship, employment issues or something else that’s hindering your ability to pay the bills during these tumultuous times, there are some options that can offer a little reprieve. One of these options that can ease the pain a bit may be forbearance. Especially as an alternative to foreclosure, deed-in-lieu of foreclosure or mortgage default.

Forbearance, Defined

If you’re having trouble meeting your monthly financial obligations, forbearance can be a helpful tool toward getting help paying your mortgage. Simply put, a mortgage forbearance can temporarily pause payments for homeowners dealing with a short-term hardship. A few examples of hardships that would be likely to qualify for a mortgage forbearance are the loss of a job, a disability or issues related to COVID-19.

Forbearance Terms To Know

Simple enough, right? Well, understanding a few key terms related to forbearance will keep it simple as you navigate the specifics of the process. Note that your specific information related to these terms can likely be found on your mortgage statement.

Servicer – Your mortgage servicer is the company that sends you your monthly mortgage statement and manages your loan.

Loan Origination – This is the process by which you apply for a new loan, and how a lender processes that application.

Payment Period – This is the period over which you are responsible for making payments. On most mortgages, the payment period is once a month, but on some it’s biweekly.

Payment Schedule – This is the schedule that determines when you make payments and how they go toward different aspects of your loan, including the principle, interest, capitalized interest and amortization.

Interest – This is essentially the money you pay for using the money you borrowed. If you know that the principle is the amount you borrowed, think of interest as the cost of borrowing that principle amount.

Capitalized Interest – When your forbearance period of pausing payments ends, your unpaid interest may capitalize, which means it’s added to your loan's principal.

Amortization Schedule – This is a table that lists each regular payment on your mortgage over time. A portion of each payment is applied toward the principal balance and interest, and the amortization schedule details how much will go toward each when you make a payment.

How A Forbearance Works

Now that you know some of the key terms, let’s take a look at how the process works, step by step. First, contact your lender. They will let you know what you qualify for and get the process kick-started. Next, you’ll work out the terms with your lender, including determining the length of the forbearance period, the amount of payment required, whether the lender will report the forbearance to credit bureaus and how you’ll repay the lender after the forbearance period ends. Once your forbearance period ends and you fulfill all the agreed-upon terms, the process is over, but the effects can last longer.

Effects Of A Forbearance

While there are some immediate positive effects like not needing to pay your mortgage for a period time, there are some negative consequences as well. Unless your lender has agreed not to report it, your forbearance will be reported to credit bureaus. This means you will need to work on reestablishing yourself as a credible borrower before being approved for future loans. This usually entails making good on the terms of your forbearance and then going 12 months with no missed payments or additional forbearances.

How Will Your Payment Period Change?

Once the terms are settled, your payment period may be suspended for the agreed-upon time. You don't need to make payments during this time, but you will still receive statements each month from your lender, as required by law.

How Will Your Current Payments Be Affected?

With a fully executed forbearance agreement, the lender agrees to accept reduced payments or no payments at all from you for up to 12 months. However, at the end of that period, you will need to start making regular payments again and repay the amount you were excused from during the forbearance period, along with interest and applicable fees. 

What Effect Does A Forbearance Have On Interest Rates?

Interest rates can change before, during and after a forbearance is applied. Keep in mind that even though interest accrues during the forbearance, it doesn’t have to be repaid until the end of the forbearance period. It’s a good idea to talk to your specific lender to get the exact details before the process begins. 

Will Applying For A Forbearance Hurt Your Credit Score?

A hard credit pull occurs when you go into forbearance and yes, this can hurt your credit score. In addition, not satisfying the terms of your forbearance when it is over can hurt your credit even more. Be sure to refer to your own credit file for more details on how this will affect your specific credit situation.

Beyond Forbearance: Know Your Options

Forbearance is likely something you don't want to have to consider, but in these trying times, it can serve as a nice financial respite. Now that you know the basics and some of the pros and cons when it comes to forbearance, you can make the decision that’s best for you. Looking for some more specific options? Rocket Mortgage has you covered when it comes to mortgage help.

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    Carey Chesney

    Carey Chesney brings a wealth of real estate sales and marketing experience to his buyers and sellers as they navigate highly competitive markets. Carey and his wife Ilze work together as Realtors® in Michigan.