Here's What Happens When You Put Your Mortgage Into Forbearance

Most people sign a mortgage with every intention of paying that loan back. But sometimes, things happen.

You might lose your job and struggle to get another. Or, you might get sick or hurt and be forced to take a break from working as a result. 

When financial hardship strikes, paying your bills can be tough. But if you don't make your mortgage payments, you'll put yourself at risk of foreclosure. That could mean losing your home and seeing your credit score take a massive dive.

A better alternative to foreclosure could be mortgage forbearance. But it's important to understand exactly what you're signing up for.

How mortgage forbearance works

When you put your mortgage into forbearance, you're basically let off the hook from making payments during a specified period. Failing to make those payments won't put you at risk of foreclosure because your mortgage lender has agreed to let your loan go into forbearance.

To be clear, though, the payments you don't have to make during your forbearance period aren't excused. Rather, they're deferred, and you'll have to make them later on. In some cases, you might even have to make up all the payments you missed while your loan was in forbearance as soon as that period is up. 

The pros and cons of forbearance

Forbearance could help you avoid losing your home to foreclosure at a time when you can't make payments. That's the upside. But there are some downsides you should know about.

First, in some cases, you might have to make up all of your missed payments during forbearance as a single lump sum. The exact terms of a forbearance agreement can vary from one lender to another, though, so that won't automatically be the case. 

Another thing you should know is that interest on your mortgage will generally continue to accrue while your home loan is in forbearance. So even if you get plenty of time to make up those missed payments, you should expect to continue racking up interest. 

Also, mortgage lenders have the right to report your forbearance to the credit bureaus. And if yours does, your credit score might take a hit.

However, that hit might pale in comparison to the damage a foreclosure has the potential to cause. A foreclosure will generally stay on your credit report for seven years, and it can serve as a major black mark during that time. So from a credit reporting standpoint, forbearance is a much better option. 

Do you need to put your loan into forbearance?

When you're experiencing financial difficulties, you may be inclined to ask to put your mortgage into forbearance. But it could pay to look at loan modification as an alternative to forbearance.

With loan modification, you change the terms of your mortgage rather than pause payments on it. Your lender might agree to loan modification if you can show that your income has declined, or that your financial situation has changed for the worse. And from there, your lender might change the terms of your loan so that instead of having to make a $1,000 monthly payment, you're only on the hook for $600 (but for a longer period than your original mortgage term).

To be clear, under loan modification, you won't have a portion of your mortgage forgiven (just like forbearance doesn't forgive the payments you miss). But it might be a better bet because you're not pausing payments you'll have to make up later on. And it could be a better option from a credit reporting standpoint. 

All told, mortgage forbearance could be a lifeline when your financial situation worsens suddenly. But if you're going to go this route, make sure you fully understand the terms of your forbearance agreement so there are no unpleasant surprises.