All You Need to Know About Mortgage Forbearance, and How to Avoid It

A middle-aged man reads about mortgage forbearance on his laptop while having breakfast in his kitchen.

Key takeaways

  • By early 2022, the share of mortgage borrowers paying on time had returned to pre-COVID-19 recession levels in areas of both high and low financial distress.

  • Remarkably, the percentage of households that were current on their mortgage payments recovered faster and further in areas of high financial distress.

  • This broad recovery suggests that a sharp rise in foreclosure rates is unlikely as pandemic-related mortgage forbearance programs come to an end.

  • Not everyone is in great shape, however. If you are someone who's deeply struggling, we'll have options for you.

Should you look into mortgage forbearance?

If you’ve been struggling with your mortgage payments for pandemic (or other reasons), the answer is a (qualified) yes.

You’re not alone.

In June 2021, as many as 1.9 million Americans were more than three months late on their mortgage payments or in active foreclosure. That’s almost three times more severely delinquent borrowers than before the pandemic. That number has rebounded significantly, as you can see in the chart below.

A chart showing the number of Americans who have made their mortgage payments on time.

While the CARES Act helped “forbearance” become a more commonly used term, forbearance is not unique to the pandemic. Mortgage lenders offered forbearance to some individuals in the past, and continue to so, even for people not directly affected by the pandemic. However, forbearance is a measure of last resort. When possible, it’s best to avoid it altogether.

You may have recently gone through a life event which changed the game for you. Let’s explore how mortgage forbearance works and what better alternatives may be available.

What is mortgage forbearance?

Forbearance is a temporary, penalty-free break or reduction in your mortgage payments during a rough financial patch.

Note that just because your lender or mortgage servicer grants you forbearance doesn’t mean they have forgiven those payments. You must still repay any missed payments once the forbearance period ends.

Alternatives to mortgage forbearance

Forbearance could impact your ability to refinance or secure a loan for a new home. That’s why – CARES Act or not – you should look into other options first and consider forbearance as a last resort.

Loan modification

A loan modification is exactly what it sounds like: a change to the original terms of your mortgage. You may ask your lender to:

  • Extend the loan term

  • Reduce the interest rate

  • Change the rate from an adjustable to a fixed rate

  • A combination of the above

Note that lenders are under no obligation to agree to a modification. A loan modification may also negatively impact your credit score.

Cash-out refinance

Refinance replaces your current mortgage with one that has better terms, such as a lower interest rate or monthly payments, or a larger loan amount. You can use the difference to pay off debt or to meet other financial needs. To qualify for a cash-out refinance, you typically need:

  • A credit score of 620 or higher

  • A debt-to-income ratio (DTI) of 50% or lower

  • Considerable home equity

Home equity loan or home equity line of credit

Both home equity loans (HELs) and home equity lines of credit (HELOCs) allow you to borrow against the equity you’ve built up in your home, with the property serving as collateral. The difference is that with a HEL, you get a lump sum upfront, whereas a HELOC gives you access to a rolling line of credit, similar to a credit card.

Repaying a HEL starts right away in the form of fixed monthly payments.

HELOCs are more flexible. There is an initial draw period, usually about 10 years, during which you can borrow funds when and as you need them (within your credit limit). During the draw period, the lender may only require you to make interest payments. Then comes the repayment period, usually 20 years, during which you repay the amount you’ve borrowed in monthly payments.

To qualify for a home equity loan or a HELOC, you will typically need:

  • At least 15-20% home equity

  • A credit score in the mid-600s or higher

  • DTI of 43% or lower

Home finance options, including HEL, HELOC, and cash-out-refinance.

Home equity agreement (HEA)

If you’re unemployed, furloughed or have a less-than-ideal credit score, you likely will have a hard time qualifying for debt-based products like a cash-out refinance, HEL or HELOC. In that case, you may want to consider an equity-based product such as a home equity agreement instead.

Because HEAs aren’t loans, there are fewer income and credit score requirements. You can typically qualify with a minimum credit score of 500 and a maximum loan-to-value (LTV) ratio of 80%. There are also no monthly payments or interest.

Here’s how it works: You get a lump sum upfront, typically up to 80% of your home equity, and the HEA provider receives a share of the proceeds when you sell the property, usually in 10 years. In effect, you are selling a portion of the equity to the HEA provider in exchange for cash.

In the meantime, you get to live in your home and enjoy all the benefits of homeownership as normal. And if you don’t want to sell your home at the end of the term, you can buy the provider out.

The bottom line: Mortgage forbearance is a serious step

Before requesting forbearance, explore all other options with your mortgage servicer and an independent financial adviser. Make sure to also look into non-debt-based products such as a HEA. Equity can often solve problems debt-based products can’t.

Learn more about Unlock Technologies' home equity agreements here.

The blog articles published by Unlock Technologies are available for informational purposes only and not considered legal or financial advice on any subject matter. The blogs should not be used as a substitute for legal or financial advice from a licensed attorney or finance professional. Links in our blogs to third-party websites are provided as a convenience and for informational purposes only; they do not constitute an endorsement of any products, services, or opinions of the corporation, organization, or individual. Unlock Technologies bears no responsibility for the accuracy, legality, or content of the external site or for that of subsequent links.