What to Do When Mortgage Forbearance Ends

Millions of homeowners sought mortgage forbearance in 2020 to help them handle a difficult economic period and adapt to living and working at home. COVID relief acts from the government expanded some protections for homeowners entering mortgage forbearance agreements, but all forbearance ends at some point.

As you look ahead to coming months, here’s what you need to know about forbearance options and mortgage relief, and how to prepare for mortgage forbearance ending.

How Does Mortgage Forbearance Work?

Mortgage forbearance is when a lender permits you to temporarily pay a reduced mortgage payment or pause payments on your mortgage for an agreed period of time. If you request forbearance, you’re still responsible for paying back the suspended balance later, and you’ll likely pay interest on that balance for the forbearance period.

Under the CARES Act, homeowners with federal or GSE-backed mortgages (e.g., most conventional loans, FHA, VA, USDA, Fannie Mae, Freddie Mac) can request an initial forbearance for up to 180 days. If you need more time, you may be eligible for forbearance extensions that can add up to a maximum of 18 months for qualified borrowers.

In February 2021, the Biden administration extended the deadline for homeowners to request an initial forbearance, as well as extending the foreclosure moratorium. If you have a government-backed mortgage, you currently have until June 30, 2021 to request forbearance.

All the mortgage providers we’ve listed offered an 180-day extension to the initial forbearance period. Homeowners with Fannie Mae or Freddie Mac mortgages who have been in an active forbearance plan as of February 28, 2021 may be eligible for two 3-month extensions to reach a maximum of 18 months. Homeowners with HUD/FHA, VA, or USDA mortgages must have requested an initial forbearance plan on or before June 30, 2020 to be eligible for up to two three-month extensions, or 18 months in total.

In any of these cases, regular interest still accrues while your home is in forbearance, but you won’t incur additional late fees, penalties, or interest.

Non-government-backed or private loans may also have forbearance options, but they may differ depending on the loan type and servicer. They don’t necessarily offer the same protections as loans that fall under the CARES Act. Be sure to ask about all limitations, options, and fees before seeking mortgage forbearance.

What’s the Difference Between Mortgage Forbearance Programs and Mortgage Deferment?

You should also know the difference between mortgage forbearance vs. deferment. Some news outlets or even some lenders use these terms almost interchangeably, which can be confusing. Here are the two main differences:

Mortgage forbearance always continues to accrue interest, whereas some deferment agreements do not accrue interest during the deferment.
Forbearance often requires a lump sum payment at the end of the term, whereas deferment typically offers a payment plan over time. If your mortgage forbearance is through the CARES Act, though, lenders cannot require that you pay via lump sum.

Forbearance has its drawbacks, and it’s not the only way for homeowners to find financial relief. Forbearance programs don’t leave you with any additional funding on hand, for example, to cover other expenses. Some families find other financial options, such as tapping their existing home equity, are better suited to help them through the pandemic because it provides cash to cover important expenses.

What Happens at the End of Your Forbearance

Repayment methods vary, but it’s important to be prepared for when mortgage forbearance ends. COVID-related stressors may continue for some time, so having clear plans in place can ensure your financial goals stay on track.

An essential part of the plan is knowing the answer to the question, “Do you have to pay back forbearance?” A forbearance plan isn’t a type of loan — it’s an agreement between a borrower and lender to suspend payment for a period of time due to hardship. Forbearance does not waive the payments during that period, and the loan balance continues to accrue interest.

Important Questions to Ask About When Forbearance Ends

If your forbearance period is drawing to a close, you need to be informed and prepared for repayment so you don’t fall into further financial difficulty. These are important questions to ask your lender about your repayment options when your forbearance program ends:

Are you eligible for any additional forbearance extension?
Will you owe the entire unpaid amount in a lump sum at the end of the forbearance or deferment period, or at the end of the loan term? (Under the CARES Act, lenders cannot require borrowers to repay via lump sum at the end of a CARES forbearance period.)
Can your loan term be extended to add unpaid payments to the end of your mortgage (rather than raising payments until the end of the original term)? This is also referred to as an extension of mortgage forbearance.
When you resume payments, will your monthly payment be higher to repay the deferred amount? What options exist for how much you will owe in additional payment, and for how long?

How to Prepare for Mortgage Forbearance Ending

In the early months of the pandemic in the United States, some experts were concerned that the end of forbearance could trigger a housing crisis, similar to when the housing bubble burst during the recession of 2008. There are some critical differences now, however, that may give homeowners more options than some experts initially feared.

One difference is that most lenders are prohibited from requiring a lump sum payment due to measures like the CARES Act, which may help homeowners structure a sustainable repayment plan.

Another difference is that rather than plummeting, home values are thriving, with median prices reaching an all-time high. Many homeowners have seen rapid appreciation in their home equity, with some companies such as Zillow predicting that home values may increase over 10% from November 2020 to November 2021. Experts predict that mortgage interest rates will stay low throughout 2021, which can also be a positive sign for homeowners interested in selling their house. Holding more equity means less risk of having an underwater insurance or ending up in foreclosure.

Ultimately, your best next steps depend on whether you plan to sell your home or adjust finances to pay an adjusted mortgage after your forbearance period ends.

Should You Sell Your Home?

Data from the National Association of Realtors indicates that a favorable combination of supply/demand factors and low recent mortgage rates has resulted in a significant increase in real estate prices in many parts of the country. Homeowners with a mortgage gained an average of $26,300 in equity in 2020, the highest appreciation gains since 2013. Some homeowners fared exceptionally well; in California, the average increase was $54,500. If you’ve been thinking about selling your home, this is likely to be an especially profitable market.

If selling sounds like a promising option, think about these action steps:

Research home values near you, and consider whether to get a professional appraisal to set an asking price.
Consider making updates or repairs you’ve been putting off. Even in a hot real estate market, you may be at a disadvantage if your home is outdated or in disrepair compared to similar properties.
Consider where you plan to live next. Are home prices in your desired area in budget? Do you need more time to save to handle closing costs or keep payments current on two mortgages until your home sale goes through? A home equity loan or a Home Value Investment could let you use home equity to keep finances steady until you’re ready to move.

If you’re coming up on the end of forbearance and your normal savings accounts haven’t recovered yet, home equity may be an important asset to prevent foreclosure. Selling your home and downsizing to a more affordable house (and taking advantage of relatively low interest rates in 2021) may be one option. A Home Value Investment or other home equity financing can also be a viable path that lets you stay in your home. Some experts believe that homeowners’ power to access lump-sum funding through home equity can be an important distinction between the current market and the Great Recession, when homeowners experienced an average home value decrease of 11%, rather than an increase of 10%.

How to Plan for Mortgage Payments After Forbearance

Chances are good that you won’t have to pay your accrued payments back in a lump sum. That doesn’t mean it’s going to be easy to resume mortgage payments, especially if your family was hard hit financially during the pandemic. Figure out financing early so you’re not caught in a tough spot.

Check savings and your current financial situation. Were you able to save enough to create a buffer once mortgage forbearance ends? If you lost your job, have you found a new one that’s sufficient to cover payments?
Explore a Home Value Investment. This form of accessing home equity won’t add monthly payments to your load, which may make it easier to focus on catching up with your mortgage. Especially at a time when home values are rising rapidly, this can let you take advantage of the equity increase while still living in your current home.
Consider loan options. A refinance, home loan, or personal loan may help get you funds you need. Read terms and interest rates carefully to evaluate which options could be right for you.
Talk to your lender about forbearance extension. Forbearance is still going to end sometime, so this isn’t necessarily ideal, but some families may still be struggling, and several federally backed lenders have recently announced additional extension opportunities. If an extension is available, use the time to explore the above options and get a concrete plan in place.

Negotiate payment terms. A short-term repayment plan adds a portion of your accrued balance to your normal mortgage payment for a specific time frame (e.g., 6 months). An extended loan modification lengthens the duration of the loan, so you tack on the missed payments at the end. Most lenders have an incentive to work with borrowers to find a plan that works.

Some homeowners find a real sense of relief by leaning on the equity value they’ve built in their home to carry them through rough patches – especially if they won’t have to worry about the interest and monthly payments that come with traditional home equity loans. Another important advantage of considering a Home Value Investment over a traditional home equity loan is that Noah shares in potential home equity loss, as well. So if your home value “corrects” or readjusts downward, that reflects in your buyout amount. This may help some homeowners feel more secure about tapping into home equity after a rapid rise in home value.

Homeowners are all doing their best to guide their families through stressful times. If meeting monthly mortgage payments is challenging right now, there are options out there that can help you avoid financial hardship. If you’d like to learn more about accessing some of your wealth in the form of home equity, we’d be happy to answer any questions about a Home Value Investment and help you decide which financing option is right for you.