How Does Deferring A Loan Affect My Credit Score
Were here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey.Read moreWe develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide.We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right.Read less
Editors Note: Since the writing of this article, the Biden administration has extended the pause on federal student loan repayment through December 31, 2022.
An unexpected layoff or a job loss could make keeping up with debt payments more challenging. When your budget is stretched thin, having the option to pause payments on credit cards, car loans, or other debts may be appealing.
Taking a break from financial obligations temporarily can offer some financial breathing room, but its important to understand how deferred payments may affect your credit score.
What Is A Mortgage Forbearance
Mortgage forbearance is an option many mortgage lenders provide for borrowers facing temporary financial hardships. When the borrower’s circumstances threaten to lead to missed mortgage payments, it can help prevent foreclosurea costly process for borrowers and lenders alike.
When a mortgage borrower seeks forbearance, the lender typically requires proof of financial hardship, evidence that the hardship is temporary, and assurances that the borrower will be able to resume payments and repay all missed payments, plus interest, at the end of the forbearance period.
Not all borrowers qualify for traditional mortgage forbearance. If you know you are going to miss mortgage payments, look into forbearancebut also consider other possible options for avoiding foreclosure, including selling the home or:
All of these options, except selling your home before you miss a mortgage payment, will be recorded in your credit reports and will likely have negative consequences for your credit scoresunless you are requesting forbearance due to the coronavirus crisis. As part of the Coronavirus Aid, Relief and Economic Security Act, mortgage accounts in forbearance as a result of COVID-19 cannot be reported negatively to the credit bureaus by lenders.
Debt settlement and forfeiting your deed in lieu of foreclosure could have a serious impact on your credit, so these are only recommended as last resorts before foreclosure.
Loans Affected And Interest
If you have a loan through the defunct Federal Family Education Loan Program or Direct Loan program, you may be eligible for deferment and forbearance. Some private loans are eligible, but it depends on the loan type and who services it.
Interest is charged on all loans during both deferment and forbearance, but who pays the interest can vary.
If you have a subsidized federal loan, the government will pay the interest during the deferment period, but not during forbearance. You are responsible for paying the interest on all other loans, whether its for deferment or forbearance.
You may make interest-only payments on the loan during the deferment or forbearance period, but if you dont, the interest may be capitalized , increasing the amount you will pay in the future.
Also Check: How To Pay Off Bad Debt On Your Credit Report
How Do You Qualify For Mortgage Forbearance
Lenders have their own procedures and practices around mortgage forbearance. That’s true of every lender type, from mortgage lenders for first time home buyers to refinance lenders. If you’re having a tough time making your loan payments, first, talk to your lender. There are certain legal protections that might apply to you.
Forbearance Process: Student Loans
For most federally held student loans, at the start of the pandemic payments and interest were automatically suspended through at least September 30, 2020. That deadline has since been pushed back and continues to update as the Covid-19 pandemic progresses. You can refer to the U.S. Department of Education for up to date information about Coronavirus and loan forbearance by visiting studentaid.gov.
However, some student loans do not qualify for this benefit, including loans under the Federal Family Education Loan Program, private student loans that are owned by commercial lenders and some Perkins Loans that are held by the institution you attended. To request a forbearance agreement or delayed payments on these loans, contact your loan servicer.
Don’t Miss: How Long Chapter 11 Stay On Credit Report
Do You Have Questions About Qualifying
Deferred Payments For Federal Student Loans
The CARES Act also extends a forbearance period automatically for eligible federal student loan borrowers . Previously, qualified students could defer student loan payments through deferment or forbearance due to hardship or other factors, but there are some changes due to the CARES Act.
Now, those with an eligible federal student loan are not required to make student loan payments through Aug. 31, 2022. The interest rate for federal student loans is set to 0% during this time, and any payments made would be applied only to loan principal.
Deferred payments still count toward required payments for Public Service Loan Forgiveness for those still employed full time, regardless of whether they pay anything toward their loans. Since payments are being suspended automatically, credit score wont be affected.
Note that once the automatic forbearance ends, payments would become due again. Borrowers would need to reach out to their lenders if they wish to continue forbearance or take a deferment instead.
As of this writing, Direct Loan borrowers or Federal Family Education Loan Program borrowers who stop paying their student loans altogether after the forbearance period is over could end up in default once payments are 270 days late. Borrowers in the Federal Perkins Loan Program are considered in default if their payment is not made by the scheduled due date.
You May Like: Will An Eviction Show Up On My Credit Report
Can You Create A Repayment Plan
When your mortgage forbearance period ends, you’ll have to repay the payments you’ve missed. This could mean making higher mortgage payments, adding an additional payment to your existing mortgage payments or extending the length of your mortgage term. Discuss your options for repayment with your financial advisor before signing on the dotted line. Making promises you can’t keep could leave you facing foreclosure in the future.
If you’re facing a temporary financial setback that makes paying your monthly mortgage payments impossible, don’t resign yourself to defaulting on your mortgage and potentially losing your home. Speak with a Customer Assistance Specialist to learn more about mortgage forbearance and other forms of mortgage relief.
Mortgage Forbearance Cares Act
The CARES Act provides mortgage forbearance to any homeowner with a federally-backed mortgage. During the pandemic, your lender cannot deny your forbearance request, nor can it demand proof of financial hardship.
Most U.S. mortgages are federally backed. Loans issued under the FHA, VA, or USDA programs qualify. Since 95% of mortgages on single-family homes in the U.S. fall into one of these categories, there’s a good chance your mortgage is eligible for COVID-19 mortgage forbearance.
Some mortgages, such as jumbo loans, aren’t federally backed. However, your mortgage servicer may well be willing to work with borrowers who need help. Even if you don’t qualify under the CARES Act, call your mortgage servicer to discuss your options.
Recommended Reading: How Can You Get Collections Off Your Credit Report
Things To Be Careful Of While Your Credit Card Is In Forbearance
Because forbearance frees up money in your monthly budget, it can come with a large sense of relief. However, putting things out of sight and out of mind could cause you to neglect your credit score if you’re not careful.
Here are some traps you may fall into while in forbearance that could ultimately affect your credit score.
Alternatives To Mortgage Forbearance Or Deferment
Alternatives to forbearance include:
- Making payments on time if you’re able.
- Requesting a mortgage loan modification. This would change the terms of your loan permanently if you qualify. This could involve reducing your mortgage interest rate. Or it could mean changing your loan payoff term.
- Refinancing. If you can refinance your mortgage to a new, more affordable loan, you may not need to pause payments.
Alternatives to deferment include:
- Making a lump-sum payment when forbearance ends for all of the payments you missed.
- Entering into a repayment plan where you tack a small amount onto each monthly payment to make up for payments missed while in forbearance.
- Refinancing to pay off your current loan, including the payments missed while you were in forbearance.
The alternatives available will depend on your credit score, your income, the options your lender makes available, and your overall financial situation.
You May Like: What Is My Transunion Credit Score
How Do I Get Out Of Forbearance
Once your forbearance period ends, you owe the amount of money that you missed. There are different options that you can choose from. Reinstatement means that you will owe the entire amount all at once. Repayment allows you to bring your mortgage up to date over time usually 12 months. This is a repayment plan that you have agreed to with your mortgage servicer.
How Do You Request A Mortgage Forbearance Agreement
The CARES Act requires mortgage servicers to provide forbearance to most U.S. mortgage borrowers, but it isn’t automatic. Your loan also does not enter forbearance if you just stop paying. Regardless of whether you qualify for a legally-protected forbearance program, you have to start the process. To request a mortgage forbearance, contact your mortgage servicer .
Read Also: How Often Does Your Credit Score Update On Credit Karma
Do You Have Other Options
When compared to simply defaulting on your loan or facing foreclosure, mortgage forbearance is a good option. Still, keeping your payments current is the best thing you can do for your financial future. Before applying for mortgage forbearance, consider these ways to get through a temporary financial setback.
- Make budget cutbacks. If you can make personal financial cutbacks to afford your mortgage, it’s the best financial option you can make.
- Borrow from friends or family. If you can borrow money from someone close to you, the terms of your mortgage and credit score will be unchanged.
- Ask your lender if forbearance is the right solution for your personal situation. Mortgage forbearance is a temporary solution. If you’re having long-term difficulties paying your mortgage, refinancing or loan modification may be a better solution.
Forbearance/deferred Payment Process: Auto Loans
A significant number of auto lenders are offering forbearance agreements or deferred payment plans during the pandemic. This includes options for existing customers as well as those looking to purchase a new vehicle. Contact your lender or automobile manufacturer to learn more about their specific deals.
Recommended Reading: How To Improve Your Credit Score
What Does Forbearance Mean For The Mortgage Industry
As weve all seen recently, regulators and the GSEs are focused on creating policies and guidance to help borrowers impacted by COVID-19 while maintaining liquidity. Unfortunately, a growing volume of consumers continue to be impacted.
While the CDIA provided guidance on data reporting, the credit system relies on the data furnishers to report accurately. Please share the information below to educate your teams on where to look for forbearance on the credit report, to help with the reporting standards required for the GSEs, and to form your own customer service approach to addressing forbearance.
CDIA Notice to Lenders
The Consumer Data Industry Association sent this notice to remind lenders and creditors how they can work with their borrowers to address financial problems that those borrowers may be experiencing as a result. Please note the specific guidance available for lenders who report information about consumers accounts affected by natural and declared disasters , or consumers accounts placed in forbearance as a result of a natural or declared disaster, or for other reasons .
CFPB Communications
The Consumer Financial Protection Bureau has sent out several communications to help lenders address how to support consumers impacted by COVID-19 as well.
- CFPB notice regarding credit reporting and the CARES ACT.
- Reinforces their position on handling payment obligations below and the extension to 45 days to for lenders to handle disputes.
Reading the Credit Report
Federal Relief For Renters
If a U.S. resident is renting a home versus owning one, they may be able to temporarily stop making rent payments without risking eviction.
Most of the federal protections for renters under the CARES Act have expired, but some states still have eviction protections in place, with varying expiration dates. There may also be state or local rent and utility assistance available for those who meet eligibility requirements.
You May Like: When Does Chapter 13 Get Removed From Credit Report
Do I Qualify For Forbearance
Depending on who your lender is, there may be standards that you need to meet or situations that you need to demonstrate before qualifying for payment relief, such as:
- Financial hardship: Layoffs, reduced income, or failure of a business
- Medical hardship: Serious illness or long-term disability
- Disaster: Natural disasters or life-threatening accidents
- : Divorce or death of a family member who is the primary income earner in the family
After determining your qualifications, you may also need to fill out an application. You are recommended to speak to your lender or service provider for additional details about the specific terms of the loan.
Will Forbearance Affect Refinancing
Yes, if you are in forbearance you are not allowed to refinance. The specific point is that any missed mortgage payments will prevent you from being eligible for refinancing with most institutions. Each individual, however, has different circumstances and each mortgage provider has different rules. It is important to check with mortgage providers what your situation would be.
Recommended Reading: How To Update Your Credit Report
Loan Term Could Be Extended
Some lenders may offer you principal forbearance, which is a form of loan modification. In this case, the lender allows you to temporarily defer a portion of the principal balance, lowering your monthly payments.
The lender will then add that principal back into the loan later. Depending on the terms of the modification, this could increase the number of months it takes to repay the loan.
Another option is when the lender simply defers your payments and places them at the end of your term. While you still make the same number of payments, this extends the payoff date by the number of payments you deferred.
Alternatively, the lender may use a second loan to repay the missed payments, adding more time until your home is paid off.
Consider Adding An Explanatory Statement To Your Reports
If you review your credit reports and find that a creditor has added derogatory information after you missed payments due to COVID-19, you may add an explanatory statement to your reports.
Technically, the credit reporting bureaus are required to place a statement in your file only if you’re disputing the completeness or accuracy of a particular item. Though, while the bureaus don’t have to include a statement if you’re only explaining extenuating circumstances or other reasons why you haven’t been able to pay your debts, they usually will.
Once you file a statement with a credit reporting bureau, the bureau must include the explanationâor a summary of itâin any report that has that information. If the reporting bureau assists you in writing the description of what happened, it may limit your statement to 100 words. Otherwise, there’s no specific word limit.
But you should try to keep your comment to 100 words or less. That way, the bureau is more likely to use your unedited statement. If your explanation is lengthy, the bureau will probably condense your information to just a few sentences or codes. To avoid this problem, keep your statement clear and concise. For example, you might say something like, “The delinquent accounts showing on my credit report were because I lost my job due to COVID-19. I intend to make up the payments as soon as I can.”
Read Also: What Does Closed Collection Mean On Credit Report
Forbearance During The Covid
Everyoneâs financial situation is unique. And due to the COVID-19 pandemic, many have faced financial difficulties. But there are government programs available to provide pandemic relief.
Capital Oneâs Relief Tool can help you explore what state and federal government programs may be available to you. You also might want to reach out to your lenders or creditors to explore their options for financial assistance.
Mortgage Forbearance Vs Deferment: What’s The Difference
If you’re struggling to pay your mortgage loan, it’s important to know that you have options to help you avoid losing your home. Both mortgage forbearance and deferment can provide some much-needed relief to homeowners in need.
To help you understand your options, we’ll take a look at mortgage forbearance vs. deferment, explain the pros and cons of each, and show you how both of these mortgage relief programs can help keep you from falling behind on your mortgage payments.
Jump To
You May Like: Is 673 A Good Credit Score