Does Mortgage Forbearance Affect Credit?

Mortgage forbearance offers a temporary financial lifeline for homeowners facing unexpected difficulties. It provides a temporary pause or reduction in mortgage payments, helping individuals regain stability. This arrangement is a formal agreement with the lender, distinguishing it from simply stopping payments. This article explores how such an agreement impacts a homeowner’s credit standing.

Understanding Mortgage Forbearance

Mortgage forbearance is a structured agreement allowing for a temporary suspension or reduction of monthly mortgage payments. This relief is typically granted for a specified period, often ranging from three to twelve months, though extensions can sometimes be arranged. It prevents delinquency and potential foreclosure during short-term financial hardship.

Common reasons homeowners seek forbearance include job loss, significant illness, natural disasters, or other unforeseen financial setbacks. Forbearance does not forgive debt; it postpones the obligation to pay. The missed or reduced payments, along with any accrued interest, will still need to be repaid in the future according to the terms negotiated with the lender. This temporary relief differs from a loan modification, which permanently alters the loan terms, or a simple delinquency where payments are missed without prior agreement.

Credit Reporting During Forbearance

During an active mortgage forbearance agreement, the way your account is reported to credit bureaus is a primary concern for homeowners. Generally, if a forbearance agreement is formally established and the borrower adheres to its terms, the mortgage account should be reported as “current” or as “account in forbearance.” This reporting status is significantly less damaging to a credit score than a missed payment or a foreclosure.

Specific protections were put in place for federally backed mortgages, including Fannie Mae, Freddie Mac, FHA, VA, and USDA loans. Under these provisions, if a borrower was current on their mortgage payments before entering forbearance, the servicer was required to report the account as “current” during the forbearance period. If the account was already delinquent before the forbearance, its status would generally remain as it was unless the borrower brought it current during the forbearance period. While a loan in forbearance is usually reported as current, lenders can still note that the account is in forbearance. This notation, while not inherently negative for credit scoring models like FICO, might be visible to future lenders and could influence their lending decisions.

Credit Implications After Forbearance

Once the mortgage forbearance period concludes, homeowners must address the accumulated missed payments, which directly impacts their credit standing. Lenders typically offer several repayment options to resolve the deferred amounts:
A lump-sum payment of all missed amounts.
A repayment plan where missed payments are spread out and added to future monthly payments.
A loan modification that alters the original loan terms to make payments more manageable.
A payment deferral, where missed payments are added to the end of the loan term, or a balloon payment due upon the sale or refinance of the home.

The primary factor for credit health after forbearance is successfully adhering to the chosen repayment plan. Failing to resolve missed payments or defaulting on new repayment terms can lead to negative credit reporting, such as delinquencies, default, or even foreclosure. Such negative marks can significantly reduce credit scores and remain on credit reports for several years. While completing a forbearance plan and making subsequent on-time payments can help restore credit standing over time, some lenders may require a period of consistent, on-time payments, often 12 months or more, before a borrower becomes eligible for new financing like a refinance.

Managing Credit During and After Forbearance

Proactive management is important for homeowners navigating forbearance to protect their credit. Establishing clear communication with your mortgage servicer is important, as they are the primary contact for understanding your forbearance agreement and repayment options. Obtain all forbearance and repayment plan terms in writing to avoid misunderstandings.

Regularly monitor your credit report. Obtain free copies of your credit reports from Equifax, Experian, and TransUnion to ensure forbearance and payments are reported accurately. Dispute inaccuracies promptly to prevent potential damage to your credit score. Maintain on-time payments on all other credit accounts (e.g., credit cards, auto loans) during and after forbearance to mitigate overall credit score impact. Create a realistic budget for post-forbearance repayment to ensure successful adherence to the new payment schedule.