Forbearance: What You Need To Know
Carey Chesney4-minute read
April 01, 2021
Let’s be honest, times are tough for many Americans. The situation 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 our COVID-19 Resources guide, and mortgage assistance info to see how we 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 mortgage forbearance. Especially as an alternative to foreclosure, deed-in-lieu of foreclosure or mortgage default.
Mortgage 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 recent disability impacting your ability to work or issues related to COVID-19. As part of the Coronavirus Aid, Relief and Economic Security (CARES) Act, homeowners have the right to request and obtain a mortgage forbearance for up to 180 days, with the ability to request an extension of an additional 180 days.
Forbearance Terms To Know
Simple enough, right? Well, understanding a few key terms related to mortgage 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 or some other payment timeframe. If you have questions about your options in this area, speak to your servicer.
Payment schedule – This is the schedule that determines when you make payments and how they go toward different aspects of your loan, including the principal and interest.
Interest – This is essentially the money you pay for using the money you borrowed. If you know that the principal is the amount you borrowed, think of interest as the cost of borrowing that principal 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 Mortgage 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 servicer. They will let you know what you qualify for and get the process kick-started. Rocket Mortgage® clients can start the process online or give our servicing team a call at (800) 508-0944.
Next, you’ll work out the terms with your servicer, including determining the length of the mortgage forbearance period, the amount of payment required, whether the servicer will report the forbearance to credit bureaus and how you’ll repay the servicer 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 servicer has agreed not to report it, your mortgage 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 mortgage forbearance and then going 12 months with no missed payments or additional forbearances.
It’s worth noting that Rocket Mortgage® won’t report payments paused during a forbearance related to COVID-19 as late.
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 servicer, as required by law.
You are allowed to make partial payments if you can afford to do so during your forbearance. The advantage of this is that you reduce the amount you need to pay back when you come out of the forbearance period. Rocket Mortgage clients can make full or partial payments during forbearance by using the custom payment option within the Payment Center.
How Will Your Current Payments Be Affected?
With a fully executed mortgage forbearance agreement, the servicer 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 catch up on amounts previously owed.
Depending on the situation and the investor in your loan, you may have several options in order to catch up on your payment. Following are some options for Rocket Mortgage clients specific to COVID-19 forbearance, but you should feel free to contact your servicer about the options that may be available to you.
- Repayment Plan: Under this option, we add part of your past-due amount to your regular mortgage payment each month until you’re current.
- Deferral or Partial Claim: We set aside all or part of your past-due amount to be paid when your loan is paid off, your home is sold or you refinance. You won’t be charged any interest on the deferred balance.
- Loan Modification: If neither of the above options work, you may qualify for a loan modification. We’ll modify the terms of your existing loan to include your past-due payments.
If feasible and desired, you can also choose to pay your total past-due amount immediately upon coming out of the forbearance in order to bring your loan current immediately.
What Effect Does A Mortgage Forbearance Have On Interest Rates?
Interest rates can change before, during and after a mortgage forbearance is applied if you have an adjustable rate mortgage that’s scheduled to adjust. It won’t change for fixed-rate mortgages. Keep in mind that even though interest accrues during the mortgage 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.
If you enter a loan modification after a forbearance, your interest rate and the term of your loan may change. The idea here is to make your payment affordable in your current circumstances.
Will Applying For A Mortgage Forbearance Hurt Your Credit Score?
A hard credit pull may occur to determine eligibility for a mortgage forbearance and yes, this can hurt your credit score. In addition, not satisfying the terms of your mortgage 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.
Additionally, how the forbearance shows up on your credit may depend on the circumstances that led to the forbearance. Modifications may or may not have an effect on your credit score. Speak with your servicer for additional details.
Beyond Forbearance: Know Your Options
Mortgage 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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The Difference Between Forbearance And Foreclosure
Mortgage Basics - 7-minute read
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The words may sound the same, but there’s a difference between forbearance and foreclosure. Here’s what you need to know.