Homeownership — 8 min read

What to Do When Your Mortgage Forbearance Ends

By Noah - December 9, 2020

Millions of homeowners sought mortgage forbearance in 2020 to help them handle a difficult economic period. Coronavirus 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 the end of forbearance, and other options if you’re still in need of mortgage relief.

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 likely pay interest on that balance for the forbearance period.

Federal or GSE-backed mortgages (e.g., most conventional loans, FHA, VA, USDA, Fannie Mae, Freddie Mac) are eligible for CARES Act protections. Under the CARES Act, you can request forbearance for up to 180 days, and you have the right to request an extension for another 180 days, 360 in all. Regular interest still accrues, but you won’t incur additional late fees, penalties, or interest. Your deadline to request an initial forbearance is December 31, 2020.

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 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, is 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:

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)?
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.

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. If you’ve been thinking about selling your home, this is likely to be a more profitable market than 10 years ago.

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.
Make updates or repairs you’ve been putting off. If your home is outdated compared to similar properties, you might be at a disadvantage.
Consider timing for a sale. Maybe you’d like to wait until spring, when the weather warms up. Maybe you’re hoping to put off selling for another year or more, possibly to wait until a child’s high school graduation. How will you keep payments current until then? 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.

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.
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 struggle financially after an initial forbearance period. 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.

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.