Forbearance 101: Explaining the effects of forbearance to your clients

According to the Mortgage Bankers Association, 8.46% of mortgage loans were actively in forbearance at the end of May. Before the COVID-19 crisis impacted the economy, the forbearance rate was much lower at 0.25%. Many consumers are worried about its long-term effects on their credit scores as the pandemic continues. This guide can help you explain the details of forbearance to your clients.

Mortgage payment calendar reminderWhat is forbearance and how does it impact the credit score?

Being in forbearance allows a consumer to pause making payments. The CARES Act (which stands for the Coronavirus Aid, Relief and Economic Security Act) permits consumers to be in forbearance for up to 180 days. The status of forbearance is just a comment on the credit report – similar to that of a natural disaster – and in and of itself does not impact the score.

However, the tradeline is still fully considered by the credit score. This means that if the account was reported as “late” before a consumer goes into forbearance, that negative information will still factor into the score. But, if they enter forbearance when their payment is 30 days late, the account won’t become any more delinquent during this period – although it won’t change to “paid as agreed” while in forbearance either.

Ideally, your clients should make that last payment and ensure their account is current at the time they enter forbearance.

Repayment options after forbearance

The missed payments must be paid back by the homeowner. FHA, VA and USDA mortgage loans do not require consumers to make lump sum payments when they are no longer in forbearance. Expectations vary for non-government loans per lender, however, so discuss with your clients what is required of them.

Note that consumers can still make payments when they’re in forbearance. Perhaps your client lost their job but secured another, improving their financial situation. Continuing to make payments can lessen the burden on clients down the line, once the forbearance period is over. All will be recorded on the credit report.

Can forbearance impact eligibility to refinance?

In May, Fannie Mae and Freddie Mac issued temporary guidance stating that consumers who are in forbearance, or who have recently ended their forbearance, are able to refinance or buy a new home after making three consecutive, timely payments under their repayment plan, payment deferral option or loan modification. However, there is no wait period for those who were able to make their mortgage payments in full while in forbearance.

For more guidance and information on forbearance, we recommend these resources:

• Consumer Financial Protection Bureau – “Mortgage and housing assistance during the coronavirus national emergency”
• HUD.gov – “Coronavirus Resources: Homeowners”