This is part of our ongoing series on mortgage relief options and how to handle your loan in a crisis.
More than 4 million homeowners requested a forbearance to pause their mortgage payments for at least a few months while they navigate financial hardship during COVID-19. But all the talk of forbearance has left a lingering question in homeowners’ minds: “Will it affect my credit score?”
To sum it up, under normal circumstances, yes, a forbearance would likely be reported to your credit and impact your credit score. During COVID-19, however, it may not.
Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a form of forbearance specific to COVID-19 was established to address the needs of homeowners during this crisis. (Head to the Consumer Finance Protection Bureau for more info on COVID-19 forbearance.)
The act applies to borrowers with Freddie Mac and Fannie Mae loans, along with government loans from the Federal Housing Administration (FHA), the US Department of Veterans Affairs (VA), and the US Department of Agriculture (USDA).
What is COVID-19 forbearance and how does it impact your credit?
Like a traditional forbearance, a COVID-19 forbearance lets homeowners with a short-term financial hardship skip their mortgage payments for up to six months, with an additional six months if needed.
Those missed payments must be made up afterward through a form of loss mitigation, such as a repayment plan, which divides the amount owed into your mortgage payments for a period of time, a loan modification, which alters the terms of your loan to make it more affordable, or a lump sum.
According to the CARES Act, there should be no additional fees, penalties, or interest added to your account during a COVID-19 forbearance — but your regular interest will still accrue.
If your payments are up to date at the time you receive forbearance your account should be reported as current (not delinquent) by your loan servicer to the three major credit bureaus. But if you already missed a payment and are approved for forbearance afterward, your account will likely be reported as delinquent on your credit report until it’s brought up to date. In this case, it will likely impact your credit score.
Could a forbearance prevent you from taking out loans in the future?
Typically, having a forbearance or payment deferral visible to creditors could impact your ability to refinance or get a new loan for at least one year after the forbearance period ended. But with so many homeowners affected by COVID-19 closures, some lenders are softening their loan application requirements.
Fannie Mae and Freddie Mac, for example, advised that mortgage lenders should accept applications from borrowers who received a forbearance or other loss mitigation in the past 12 months, as long as they repaid their missed payments and have paid their mortgage on time for three consecutive months.
However, whether borrowers will qualify for a loan will still be decided by each lender on a case-by-case basis.
What can you do about it?
Whether you’re taking out a traditional forbearance or a COVID-19 forbearance under the CARES Act, it’s best to be as informed as possible about how it could impact your ability to take out loans in the near future.
Before agreeing to a forbearance, take note of the following:
- Information about a COVID-19 forbearance may appear in the “comments section” of your credit report, which is only visible to lenders (you as a consumer cannot see it).
- A good precautionary step before accepting a forbearance is to ask your lender if and how they plan to report the action to the credit bureaus. If they say it will not be reported (even in the comments section), you may want to get that assurance in writing.
- You can also ask your lender to indicate in your credit that you received a forbearance because you are “affected by natural or declared disaster” – but keep in mind that they are not obligated to do so.
- Since forbearance does not erase your mortgage payments and you will need to repay what you missed once your forbearance period ends, it’s best to reserve forbearance for a financial emergency when you truly cannot pay your mortgage.
Whether you move forward with a forbearance is your decision. You may want to move money around and keep your mortgage current instead. (Not sure how? Check out our post on financially prioritizing your mortgage.) You can also inquire about other loss mitigation options.
Whatever your choice is, we’ll be here to help you along the way. Since news regarding COVID-19 forbearance is ever-changing, check back with this post for updates.