How forbearance works
Forbearance doesn’t wipe out your monthly payments, it just allows you to postpone them without getting hit by late fees. Because the credit bureau reporting of overdue payments is suspended, you won’t take a hit to your credit score for taking a break from your loan.
If you're not currently in forbearance but just got laid off or have another reason to start deferring your mortgage payments, the president has extended the enrollment window through June 30.
The relief is limited to the estimated 11 million homeowners who hold federally backed mortgages, which make up the majority of U.S. home loans. Those include:
- Loans sold to government-sponsored mortgage giants Fannie Mae or Freddie Mac.
- Mortgages guaranteed by U.S. agencies including the Federal Housing Administration (FHA loans), the Department of Veterans Affairs (VA loans) and the U.S. Department of Agriculture (USDA loans).
Americans with government-backed loans also are protected by a federal ban on foreclosures, which Biden is keeping in place until June 30, the White House announced on Tuesday. That moratorium had been scheduled to expire in March.
Once forbearance eventually ends
An estimated 2.7 million homeowners holding 5.35% of the nation's mortgage loans are currently in forbearance, according to data from the Mortgage Bankers Association.
If you're in that group, these are your options for making up your missed payments once the program is finally brought to a close.
- Tacking them on at the end of your mortgage term.
- Making additional payments — on top of your regular mortgage payments — for up to 12 months.
- Agreeing to make a lump-sum repayment when the home is sold or refinanced, or when the mortgage term comes to an end. A Mortgage Bankers Association survey found this was the most popular option.
Alternatives to forbearance
Face it: Though the government has been very willing to stretch out the mortgage freeze, the forbearance program will eventually wind down and borrowers will have to pay the piper — or, in this case, the loan servicer.
If you'd rather not keep delaying your eventual day of reckoning with your mortgage, here are two ways to make your loan more manageable and stay current on your payments.
1. Refinance to cut your monthly bill.
You don’t need to keep deferring your payments to get some relief from your mortgage bills.
The economic turmoil resulting from the pandemic has resulted in the cheapest mortgage rates on record, meaning you're probably due for a refinance that could slash your housing costs.
An estimated 16.7 million homeowners have the potential to reduce their mortgage payments by an average $303 through refinancing, the mortgage technology and data provider Black Knight said earlier this month.
Refi rates can vary widely from one lender to the next, so it's crucial that you shop around. Get at least five rate quotes to find the best rate available in your area and for a person with your credit score.
2. Ask for a loan modification
Most lenders and loan servicers have been willing to work with homeowners during the pandemic. You might ask about a loan modification, which would keep you in the same mortgage but with new terms that should be easier for you to meet during this time of financial challenges.
If you fear you're at risk of defaulting, a mortgage mod allows you to change one of the key features of your loan.
You might be able to negotiate a lower interest rate or monthly payment, or the lender might be willing to shrink the balance remaining on your loan.
Modification can come with administrative or filing fees. You'd have to weigh whether those would be more expensive than the closing costs associated with refinancing your mortgage.