How Will Mortgage Forbearance Affect My Credit Score?

What does Forbearance mean for me?

The COVID-19 pandemic has put a significant financial strain on many people. Due to a higher unemployment rate than we have seen in decades, declines in compensation and other economic factors, paying the bills today is harder than it was just a year ago. This has led many people to face a variety of challenging financial decisions including whether or not they should make their next mortgage payment.

Consider Forbearance

If you are struggling with making your mortgage payments, stopping payments could be a bad option as it could lead to foreclosure. For many property owners, a better option could be to negotiate a forbearance with their mortgage lender. With this agreement, you will receive temporary relief from your mortgage lender. This could include allowing you to delay mortgage payments for a few months, waiving interest for a period of time or other options.

If you are going to work with your lender to forbear part of your mortgage obligations, it is important to understand what consequences there could be. One way that you could be affected is through an impact to your credit score. There are a variety of factors that could influence your credit score if your lender agrees to modify your mortgage obligations.

Does Lender Report to Credit Bureau

One of the most important factors that will influence whether forbearing your mortgage will result in a credit score impact is if your mortgage lender reports the change to the credit bureaus. Each mortgage lender will be able to decide on their own whether or not this will be reported to the three major bureaus. If it is not, it will not impact your credit rating in any way. It is important to ask your lender if they do plan on reporting it to the credit reporting agencies.

Payment History Prior to Modification

Another factor that will influence your credit rating is what your payment history was prior to your modification. If you started to fall behind on your mortgage payments and were 30 or more days past due, this default will have been reported to the credit agencies and will affect your rating. If you were current on your payments prior to the modification, your credit rating should remain strong prior to the modification.

Compliance with Modification

In some situations, you may be able to retain a strong credit rating if you stay in compliance with the modified mortgage agreement. However, if you start to fall behind on payments in the future, it will have a negative impact on your rating and score. Due to this, you should continue to aim to comply with this mortgage obligation as well as possible.

Impact if Mortgage is not Modified

While it is clear that forbearing your mortgage could have an impact on your credit rating, it is important to consider the affects that could occur if you do not modify the loan. If you are struggling with your mortgage payments today, modifying the mortgage will give you some relief. If you do not receive this relief and fall behind on payments to your lender, the missed mortgage payments will be far more damaging to your credit rating and could also force you into foreclosure.

Disadvantage of Forbearing Mortgage

While there can be benefits of modifying your mortgage, there are disadvantages as well. Beyond the potential impact on your credit history, it may only delay your financial challenges. While a mortgage lender may delay your payments for a few months, they will expect that they are repaid. In fact, in some situations, they will require that you make all of your delayed payments once the modification period is over. This could be a tough financial challenge that could lead to a foreclosure if it is not met.

Other Options

While there are a lot of situations when modifying the mortgage will make sense, there are other options to consider as well. One option to consider would be to sell your property, it will allow you to avoid the foreclosure process. Further, you may get money out of it that you could use for a variety of purposes. It is important that you have a place lined up to live in if you do sell your home and need to move.

For anyone that is struggling to make their financial obligations each month, receiving support from their mortgage lender could be a great option. If you do have your mortgage modified, it could have an impact on your credit history and rating that could stay on your report for several years. It is important to consider this when determining whether or not formally forbearing your mortgage is right for you and your situation.