Banking and Finance

Understanding Forbearance

July 27, 2021

Due to recent economic strains following the coronavirus crisis and related shutdowns, reports show that nearly 4% of all mortgage loans are now in forbearance. Even though mortgage rates are continuing to drop due to low interest rates all-around, many homeowners have still found themselves unable to make mortgage payments.

However, mortgage forbearance isn’t the only type of forbearance that exists. If you’re having trouble paying off a private student loan, you can look into student loan forbearance as well. All of these are terms to describe an action that allows you to temporarily suspend payments.

What else is there to know about forbearance and is it right for you? We’ve got the answers.

What is Forbearance?

What’s the forbearance definition? It’s a form of loan relief that allows borrowers to temporarily suspend their payments due to economic hardship. Usually, you’ll have to negotiate the terms and length of your forbearance period with your lender.

Under normal circumstances, you have to demonstrate some sort of economic hardship to qualify for forbearance, especially mortgage forbearance. This can be anything from the loss of a job to a major illness that affects your ability to work and therefore pay off your loan.

What about deferment? It’s likely that you’ve heard of this term in relation to forbearance, but it’s not quite the same. With deferment, you’re usually deferring payments for a longer period of time, often up to three years. 

Forbearance, on the other hand, is a pause in your payments for usually only up to one year. With forbearance, your loans will also still be accruing interest even if you’re not having to make payments. However, due to the recent economic crisis, certain loans are eligible for zero-interest forbearance.

Types of Forbearance

Forbearance simply refers to the temporary suspension of your loan payments. This means that there are different types of forbearance that fit the forbearance definition. While you’ll have to talk to your specific lender about your options, there are three main types you might want to consider at the moment.

Mortgage Forbearance

The CARES Act includes an article about a potential 12-month deferral mortgage option for homeowners. Beginning March 18th, 2020, it noted that they were protected from any sort of foreclosure. And, it also allowed homeowners to defer their mortgage payments for 180 days (initially). After the 180 days is over, you can contact your mortgage lender every 90 days to make an extension, for up to a year in total. And, this is all possible without affecting your credit score.

Depending on who your mortgage loan is with, you might have to complete a mortgage forbearance plan in order to qualify. However, most lenders aren’t currently requiring that you show hard proof of economic hardship simply due to the sheer amount of people who need to turn towards forbearance due to job loss or reduced working hours as a consequence of shutdowns.

Student Loan Forbearance

In March, following nationwide shutdowns due to the coronavirus crisis, Federal Student Aid announced that all federal student loan borrowers would automatically be placed in an administrative forbearance until September 30th, 2020. You don’t have to do anything to qualify and your loans are automatically placed in forbearance where they won’t earn interest. If you’d like to opt-out of this, you can.

Normally, student loans are placed in forbearance for a six-month period after you graduate. It’s important to check the type of loan you have as some are still earning interest while you’re enrolled in school even though you’re not technically required to pay them off at that time.

Auto Loan Forbearance

While qualifying for auto loan forbearance is usually difficult, numerous lenders are offering payment deferrals for 90 to 120 days due to the coronavirus crisis. It’s important to contact your lender first. And, be sure to check which banks are offering relief. While they’re typically offering credit card relief, if you have a private loan through the bank, you might also qualify for forbearance, too.

Should I Get a Loan Forbearance?

When looking up the forbearance definition it appears to be a great financial option if you’re having trouble making loan payments. But, people often forget to ask, “does forbearance hurt my credit?”

It’s actually better for your credit score than if you were to miss a payment or two. Missing even one student loan payment can hurt your credit score. However, going into student loan forbearance means that your loan will continue in good standing and your account will appear to be in good standing as well. This doesn’t hurt your credit score. But, you won’t be earning credit points either for making on-time payments.

And, under the CARES Act, going into mortgage loan forbearance also won’t hurt your credit score. You can currently postpone your payments for up to a year in total without hurting your credit. So, if you’re truly having trouble making your loan payments, it might be worth it. Just remember that the loan could still be accruing interest and that you will eventually have to pay that loan off in full.

How to Get a Loan Forbearance

The easiest way to get a loan forbearance is to contact your lender directly. If you currently have a federal loan it will be easier to qualify at the moment. However, numerous independent lenders are offering forbearance relief as well.

If you’re not sure how to find out who services your loan, check out the Mortgage Electronic Registration Systems (MERS) website. Most private loan companies are working together with the CFPB to provide aid and assistance to homeowners who have been affected by COVID-19.

For student loans, it’s best to log into the Federal Student Aid portal to check on your loans; they might have already been placed in forbearance.

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