What Is Loan Forbearance?

What Is Loan Forbearance?

Qualifications and repayment terms differ by loan type and according to policies of individual lenders, but forbearance is generally:

• Short term: Typical forbearance periods last no more than 12 months, after which you are expected to resume regular payments. Some forbearance programs permit renewals at the end of a 12-month stint if you have very unique circumstances.
• Subject to repayment: Lenders expect you to repay any sums you were excused from paying during the relief period. These can be in the form of a lump sum, installments in the form of surcharges to your regular monthly bill or additional payments added to the end of your loan term. Interest charges, over and above those included in your loan terms, are typically applied to the repayment sums.
• Offered only upon request: Lenders and loan servicers do not extend forbearance unless you ask for it. A forbearance request won't guarantee you'll get it, but you'll never get it unless you ask.

What Is Student Loan Forbearance?

Issuers of federally backed student loans offer two kinds of forbearance:

• General forbearance: Available at the discretion of the loan servicer, general forbearance may provide relief from loan payments when you are faced with steep medical bills, unemployment or significant income reduction. If you qualify, your payments can be reduced or paused for up to 12 months, after which you may request another forbearance. Some programs impose a limit of three years' forbearance over the life of the loan.
• Mandatory forbearance: Your loan servicer must accept your forbearance request if:
  • Your loan payments exceed 20% of your monthly gross income.
  • You are a teacher who qualifies for student loan forgiveness.
  • You serve in the National Guard or are enrolled in the Department of Defense's loan repayment program.
  • You are enrolled in a medical or dental internship or residency.
  • You serve in AmeriCorps or similar volunteer-based programs.

Borrowers with federally subsidized student loans may also qualify for loan deferments on the basis of financial hardship, unemployment, military service or college enrollment. Deferment can be harder to get than forbearance, but because it can bring significant interest savings compared with forbearance, it's worth pursuing if you qualify.

What Is Mortgage Forbearance?

Mortgage forbearance is an option many, but not all, mortgage lenders offer borrowers with temporary financial hardship. (Payment deferment is not typically an option with mortgages.) The goal of mortgage forbearance is preventing foreclosure—a process that's expensive for lenders as well as for borrowers.

If you seek mortgage forbearance, your lender will likely require:

• Proof of your hardship
• Evidence that it is temporary
• Your commitment to resume payments and repay the amount forgiven during forbearance, plus interest, at the end of the forbearance period

Mortgage issuers typically require repayment in a lump sum or in no more than 12 monthly installments at the end of the forbearance period.

How to Apply for Forbearance

Other than issuers of federally backed student loans, lenders are under no obligation to provide loan forbearance. Some do not offer it under any circumstances, and those who do may need strong assurances of your ability to resume regular payments before they grant forbearance.

Before approaching any lender to request forbearance, the following preparation can be helpful:

1. Gather paperwork. Collect documents that illustrate your financial hardship, such as pay stubs or bank statements that show reductions in household income, bills or receipts that reflect extra expenses, and so on. If you're seeking student loan forbearance based on participation in educational, military or public service programs, provide proof of eligibility. The lender or servicer will likely require you to include these documents with any formal forbearance application, and collecting them ahead of time can help you summarize your case succinctly.
2. Explain your hardship and why it's temporary. Get in touch with your lender or loan servicer and lay out your situation as clearly as possible, being specific about changes in monthly income or expenses and, to the fullest extent possible, when and why you expect your finances to improve. You'll need to provide a realistic idea of when you can resume regular payments, and you may be asked to back up that estimate with evidence of a job offer, the end of extraordinary expense levels and the like.
3. Prepare for repayment. Lenders typically expect you to repay (with interest) all full or partial payments you were excused from during the forbearance period. Student loan issuers may allow you to add repayment to your loan term, but mortgage lenders typically seek repayment in a lump sum or no more than 12 monthly payments after forbearance ends.
4. Maintain payments if possible. Continuing to meet your payment obligations while the lender or servicer processes your forbearance application could work in your favor, signifying that you anticipated difficulties and acted before they overwhelmed you. If you are truly overwhelmed, however, partial payments can be a sign of good faith.
5. Communicate with your lender. Respond promptly to any messages or correspondence you receive from your servicer and do your best to communicate honestly and proactively with them, alerting them ahead of time if you'll be missing a payment or making partial payment, for instance. No one enjoys these conversations, but silence and avoidance can work against you when you're seeking loan forbearance.

Is Forbearance the Right Choice for You?

If loan forbearance can help you through a temporary financial crisis, it can be a great option. Before requesting it, however, you should be brutally honest with yourself about whether there's a clear end in sight to your cash flow issues, and if you'll be able to follow through on a forbearance repayment plan.

If either is in doubt, your chances of qualifying for forbearance are slim. Furthermore, since interest continues to accrue during forbearance, you risk emerging from the relief period with greater debt and a loan servicer that's unlikely to grant additional concessions.

If defaulting on your loan appears inevitable, it may be better to start a conversation about other alternatives, such as foreclosure, loan settlement or even bankruptcy.

Even if forbearance is in the cards, it may make sense in light of your current crisis to consider steps to economize in order to better afford your payments.

• Reduce expenses. Cut back on extra costs such as dining out, takeout meals, boutique coffee and streaming services. You can resume these luxuries when your finances are back on track.
• Increase income. Consider a second part-time job or gig work (ridesharing, pet care or babysitting, for example).
• Sell unnecessary assets. It may be time to offload collectibles, unused housewares or furniture and put the proceeds toward debt payments.

How Does Forbearance Affect Credit?

The impact of forbearance on your credit may differ by loan servicer and loan type.

• Student loans: If you abide by the terms of a student loan forbearance agreement, the loan will remain listed in good standing on your credit reports.
• Mortgages: Your lender can report your account to the credit bureaus as in forbearance or "paying under a partial payment agreement." This may hurt your chances of qualifying for new credit, but is less damaging than foreclosure.

The Bottom Line

If you're facing short-term financial hardship, loan forbearance can be a helpful stopgap that minimizes potential damage to your credit. Checking your free credit score from Experian can help you monitor its impact on your credit during the relief period and long after your finances are back on track.