Forbearance And Future Loans: What You Need To Know

Forbearance is a short-term reduction or suspension of loan payments in response to temporary financial hardship. It is important to note that interest accrues during the forbearance period. Forbearance can be applied to different types of loans, including student loans and mortgages. The impact of forbearance on future loans depends on several factors, including the type of loan, the lender's reporting practices, and the borrower's ability to resume regular payments after the forbearance period. While forbearance itself may not negatively affect your credit score, missing payments prior to or after the forbearance period can harm your creditworthiness.

Does forbearance affect future loans?

Student loan forbearance

Forbearance is a temporary postponement or reduction of student loan payments for those experiencing financial difficulties. The terms of forbearance depend on the type of student loan.

Federal Student Loans

Forbearance can be granted for up to 12 months at a time. Applicants must apply to their loan servicer, usually over the phone, and continue making payments until they receive confirmation that their request has been approved. Interest accrues on all loans, including federal subsidized loans, during the forbearance period. However, interest will not be added to the principal balance on Direct Loans.

Private Student Loans

Private student loan forbearance varies and is more limited than the federal program. The terms and fees associated with postponing private student loan payments are based upon the contract and applicable laws. They may be different for each servicer and may not be as favourable as the terms of forbearance available for federal student loans.

Mortgage forbearance

The impact of mortgage forbearance on future loans depends on several factors. Firstly, it depends on how lenders report the forbearance to credit bureaus. If the lender reports the forbearance as "paid as agreed," it should not negatively affect your credit score. However, if the lender reports delinquent payments, it could harm your creditworthiness. Therefore, it is crucial to understand the terms of your forbearance agreement and how your lender will report it.

Additionally, to be eligible for a new home loan after forbearance, you will need to reestablish yourself as a credible borrower. This typically involves bringing your payments up to date and making several timely mortgage payments consecutively after exiting forbearance. The funds used to bring your account current must come from acceptable sources, such as gift money, savings, or 401K disbursements.

During the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act provided additional relief for individuals with federally backed mortgages. Under this act, borrowers could request a forbearance period of up to 180 days, with the option to request one extension for the same duration. The Federal Housing Finance Agency (FHFA) also offered payment forbearance of up to 12 months to borrowers impacted by the pandemic.

Forbearance and credit score

Forbearance is a type of financial hardship plan that lenders use to help customers in need. It is a temporary change in payment terms for an account, which can include suspended or reduced payments. Forbearance is often used to describe mortgage relief, but it can also apply to student loans, auto loans, credit card balances, utilities, property taxes, and small business loans.

If you are granted forbearance, your credit score should not be affected as long as you stick to the agreed-upon schedule for resuming regular payments and making up for missed payments. However, lenders reviewing your credit report may be aware that you have experienced financial hardship. It is also important to note that if you missed a payment before forbearance approval, your credit score will be affected.

To be eligible for a new home loan after forbearance, you will need to re-establish yourself as a credible borrower. This means bringing all payments up to date and making at least three consecutive timely mortgage payments after exiting forbearance. The funds used to bring the borrower current need to be documented, and the source of funds must be what is normally accepted (e.g. gift money, savings, 401K disbursement).

During the COVID-19 pandemic, individuals with federally backed mortgages who were experiencing financial hardship due to the pandemic could request a forbearance period. This was also the case for student loans, with the Department of Education announcing a suspension of payments on federal student loans.

Forbearance eligibility

Mortgage Forbearance

Mortgage forbearance is available for homeowners dealing with an event that affects their ability to pay their mortgage, such as a job loss, natural disaster, or major illness. It allows homeowners to make lower monthly payments or skip payments for a specific period of time, typically not exceeding one year. To be eligible for a new home loan after forbearance, individuals typically need to re-establish themselves as credible borrowers. This may involve bringing all payments up to date and making several timely mortgage payments consecutively after exiting forbearance. The source of funds used to bring the borrower current must also be documented and from normally accepted sources, such as gift money, savings, or a 401K disbursement.

Student Loan Forbearance

Forbearance is also an option for student borrowers who are unable to repay their loans. It can be granted if the borrower does not qualify for deferment, providing temporary relief by reducing or suspending payments for up to 12 months. Student loan forbearance does not negatively impact credit scores, but late or missed payments prior to forbearance approval can affect credit ratings.

Forbearance and future borrowing

Forbearance is a short-term reduction or suspension of loan payments in response to a borrower's temporary financial hardship. It is important to note that interest accrues during the forbearance period. Forbearance can be applied to different types of loans, including student loans and mortgages.

Student Loans

Student loan forbearance provisions are included in federal loan agreements, so federal student loans will remain listed in good standing on credit reports during forbearance. As long as eligibility requirements are met and the agreed-upon payment schedule is maintained, credit scores should not be affected. Private student loans may or may not contain forbearance provisions, and if they do, they may be less lenient than those on federal loans.

Mortgages

Mortgage forbearance provides temporary relief by allowing borrowers to make lower monthly payments or skip payments for a specific period. It is intended for homeowners dealing with events such as job loss, natural disasters, or major illnesses. To be eligible for a new home loan after forbearance, individuals must reestablish themselves as credible borrowers. According to guidelines, a borrower who has exited forbearance is eligible for a new loan if all payments are brought current, and at least three consecutive timely mortgage payments are made.

Impact on Credit Score

The impact of loan forbearance on credit scores depends on how lenders report relief payments to credit bureaus. Forbearance is generally not considered negative information and should not harm credit scores as long as the borrower adheres to the agreed-upon schedule for resuming regular payments and making up missed payments. However, if payments are reported as delinquent, forbearance may negatively impact credit. Lenders are not required to report forbearance, and some may choose not to.

Frequently asked questions