What Is Loan Forbearance?
April 10, 2020
Loan forbearance is when your lender agrees to let you pause or decrease your loan payments for a limited time. Fortunately, there are many different kinds of arrangements that can be decided upon between a borrower and a lender, which means that solutions can be found to suit a wide variety of needs.
If you are going through a time of difficulty or even crisis, you should consider whether forbearance is right for you, and that starts with understanding if you qualify for it, how it works and what impact it can have on your credit.
Who Qualifies for Forbearance?
Typically, any loan payer who is experiencing a short-term hardship that creates serious financial strain—such as losing a job or sustaining an injury—can request forbearance from their loan owner. If you want to submit such a request, you should ask your lender about your options as soon as possible, as you do not want to risk waiting too long after a qualifying event and missing your chance to get help.
While your lender is not required to grant forbearance, many are willing to negotiate a compromise that works well for both parties. After all, loan owners, such as banks, do not want to assume the costs of things like home foreclosures when their borrowers cannot make their payments.
How Does Forbearance Work?
In general, the goal of forbearance is to give someone more time to make the necessary payments on a loan. How this is ultimately accomplished is different depending on each person’s unique circumstances—you can talk to your lender to determine how long your forbearance will last, how your payments will be affected and how you will handle repayment.
Something that’s important to note is that most loans do still accrue interest during forbearance, so make sure to ask about interest beforehand so it does not take you by surprise when you are able to resume making payments again. Make sure you get the agreement in writing, and don’t be afraid to ask your lender to break down details like interest and repayment term changes.
Now take a look at how forbearance is specifically applied to student loans and mortgage loans.
Student Loan Forbearance
Student loan forbearance can be a good option if you are a student who is having trouble making payments, but keep in mind that it will probably stop you from progressing toward loan forgiveness for the duration. In addition, your loan servicer will have to determine whether you qualify for “general forbearance” or “mandatory forbearance.”
General forbearance is when your ability to make payments is affected by financial difficulties and can only be granted for up to 12 months at a time, for up to three years total. Lenders do not have to grant these requests.
Mandatory forbearance must be granted (for up to 12 months at a time) if you meet one of a number of qualifications including:
- Serving in a medical residency program
- Being a member of the National Guard
- Performing certain teaching services
Mortgage Loan Forbearance
Mortgage loan forbearance can be a real relief to you as a homeowner, so long as you understand the terms of your specific arrangement.
For example, a lender might agree to let you reduce your loan payment by half for a number of months, but then require you to pay what you missed in one lump sum when that time has passed. Or, a lender might allow you to delay paying on the principal amount of the loan for a time, but still require you to make interest payments.
Be aware that your lender is not always obligated to grant your request.
Will Forbearance Hurt My Credit?
Loan forbearance should not have any impact on your credit. Your lender may report your forbearance, but so long as you fulfill your part of the agreement, no missed payments will be recorded and your score will be unaffected by your choice to participate in a forbearance.
Taking this measure can actually even protect your credit by keeping you from making late payments or foreclosing on your home, for example, which would both affect your score negatively.
Which Is Better: Forbearance or Deferment?
The terms “forbearance” and “deferment” are often used interchangeably, but there are some key differences between the two.
When it comes to student loans, deferment can last longer and will not cause interest to accrue, so it may be the preferred option. On the other hand, forbearance usually has less strict requirements regarding qualifying events and is specifically intended to help those experiencing temporary hardships.
There is less of a distinction between forbearance and deferment when it comes to mortgage loans, though some companies may choose to explicitly distinguish between the two, as in an example below.
Coronavirus and Forbearance
Due to the widespread medical and financial issues caused by the coronavirus pandemic, many loan payers are finding it hard or even impossible to make their mortgage payments on time. As a result, mortgage loan companies and the government are proposing a variety of solutions to ease consumers’ money worries.
- One significant aid is the CARES Act, which allows homeowners who have federally backed loans and are affected by COVID-19 to request up to 180 days’ worth of forbearance (plus an additional 180 days if necessary). In addition, the CARES Act places a temporary moratorium on foreclosures.
- People with federal student loans should know that their loans are automatically in forbearance until September 30, 2020, thanks to the CARES Act. There will also be zero percent interest on these loans.
- Mortgage loan companies Fannie Mae and Freddie Mac are offering payment deferrals as an alternative to forbearance; this option allows borrowers to make their deferred payments on the mortgage maturity date or the payoff date, whichever comes first. This means that the missed payments are tacked onto the end of the loan rather than in the middle of the loan, as with forbearances.
One of the most important things to remember is that forbearance is not the same thing as forgiveness, and it’s not free money. However, you can still greatly benefit from forbearance, both now and in the future. If you’re interested in learning more about this and other financial issues related to your credit, reach out to a credit consultant today.
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