Forbearance What It Is How It Works Pros Cons
885 reads · Last updated: November 21, 2025
The term forbearance refers to the temporary postponement of loan payments, typically for a mortgage or student loan. Lenders and other creditors grant forbearance as an alternative to forcing a property into foreclosure or leaving the borrower to default.The companies that hold loans and their insurers are often willing to negotiate forbearance agreements because the losses caused by foreclosures or defaults typically fall on them.
Core Description
- Forbearance is a lender-approved, temporary pause or reduction in required loan payments to help borrowers manage short-term financial hardship.
- Unlike forgiveness, forbearance does not eliminate debt. Interest generally continues to accrue during the period, and missed payments must eventually be repaid.
- Forbearance helps prevent defaults and foreclosures, offering borrowers immediate relief and structured options to resume repayments once the hardship concludes.
Definition and Background
Forbearance refers to a formal agreement between a borrower and a lender that temporarily suspends or reduces scheduled loan payments owing to a documented short-term hardship. This arrangement is most commonly associated with mortgages and student loans but can apply to auto loans, small business loans, and other types of debt.
The practice of forbearance dates back to the 19th century when financial institutions occasionally granted payment suspensions in crisis situations to protect collateral value. Over time, forbearance has become institutionalized, particularly in the United States, through initiatives such as the New Deal housing programs, standardized Federal Housing Administration (FHA) and government-sponsored enterprise (GSE) servicing rules, and enhancements under the 2008 Home Affordable Modification Program (HAMP). During the COVID-19 pandemic, the application of forbearance expanded significantly under the 2020 CARES Act, allowing millions of mortgage borrowers to pause payments for up to 18 months with the aim of limiting foreclosures amid widespread economic disruption.
Forbearance differs from other forms of relief, such as deferments, grace periods, or permanent loan modifications, by its explicit purpose: to offer a short, transitional period for borrowers to stabilize their finances before resuming regular payments.
Calculation Methods and Applications
The principal calculation in forbearance concerns how interest accrues and how deferred amounts are managed after the forbearance period. Understanding these mechanics is crucial for assessing the actual cost and future implications.
Accrued Interest
During forbearance, most loans continue to accrue interest. This interest may be:
- Capitalized: Added to the principal balance, increasing the total amount owed.
- Paid monthly: In some cases, borrowers may be required to pay accrued interest even when principal payments are paused.
Interest Calculation Example
Suppose a borrower has a USD 300,000 mortgage at a 4% annual percentage rate (APR). Monthly interest accrual is calculated as follows:
- Monthly interest = Principal × (APR / 12)
- USD 300,000 × (0.04 / 12) = USD 1,000 per month
If the forbearance period lasts six months:
- Total interest accrued = USD 1,000 × 6 = USD 6,000
At the end of this period, the borrower may address this USD 6,000 in one of several ways:
| Repayment Option | Description |
|---|---|
| Lump Sum Payment | Pay all deferred amounts at once |
| Repayment Plan | Spread the owed balance over several months |
| Loan Term Extension | Extend the loan term to accommodate missed payments |
| Deferral to Maturity | Move missed payments to the end of the loan term |
| Modification | Permanently alter loan terms or re-amortize the balance |
Practical Application
Forbearance is most frequently used in situations of predictable, temporary hardship, such as unexpected job loss, medical emergencies, or natural disasters. Landlords may use forbearance to mitigate periods of rent shortfalls, and student loan borrowers might request it during illness or career transitions. Active-duty military personnel sometimes utilize forbearance during deployments.
Regulatory protections, such as those in the CARES Act, may define eligibility, maximum duration, and specific repayment terms for forbearance, particularly for federally backed loans. Private lenders may have distinct criteria and procedures.
Comparison, Advantages, and Common Misconceptions
Comparing Forbearance with Similar Options
| Option | Purpose | Interest Accrues? | Typical Use Case |
|---|---|---|---|
| Forbearance | Pause or reduce payments during hardship | Usually yes | Temporary cash-flow challenges |
| Deferment | Delay payments (may pause interest) | Sometimes | Student loans, after school or grace period |
| Modification | Permanent change to loan terms | Varies | Long-term unaffordability |
| Grace Period | Short-term, pre-delinquency window | No | Standard benefit after new loan origination |
Key Advantages
- Immediate cash-flow relief: Pausing payments allows borrowers to allocate funds to essential expenses during a temporary crisis (such as housing, food, or medical care).
- Risk reduction of default and foreclosure: By suspending required payments, borrowers reduce the likelihood of severe credit consequences and legal actions.
- Personalized repayment options: Many modern forbearance programs offer multiple paths for resuming payments, providing flexibility after the hardship ends.
Disadvantages
- Accrued interest increases total cost: Unless specifically waived, interest accrued during forbearance is added to the balance, leading to a higher overall loan cost.
- Potential impact on credit: While properly managed forbearance typically protects against new derogatory marks, previous delinquencies and notations of "forbearance" may still influence lending decisions.
- Possible payment shock: After forbearance ends, borrowers may face higher or lump-sum payments, which can cause additional financial stress if not anticipated.
Common Misconceptions
- Forbearance is not forgiveness: Deferred payments and accrued interest remain due after the forbearance period.
- No automatic approval: Borrowers must qualify and document their hardship.
- Interest almost always accrues: Many believe interest stops during forbearance, but it typically continues.
- Credit score is not always protected: Reporting policies may vary by servicer, and delinquencies prior to forbearance persist.
Practical Guide
Effectively using forbearance involves understanding the process, being aware of potential mistakes, and carefully assessing your financial circumstances.
When to Consider Forbearance
Forbearance is most appropriate for short-term and defined hardships, such as a sudden layoff, medical leave, or natural disaster. If you anticipate ongoing inability to pay, other solutions like loan modification may be more suitable.
How to Request Forbearance
- Contact your lender or loan servicer earlyReach out as soon as you anticipate financial difficulty. Initiate a formal discussion before missing any payments.
- Document your hardshipPrepare relevant documents such as termination notices, medical bills, disaster declarations, and personal statements regarding your loss of income.
- Clarify termsInquire about the length of forbearance, interest accrual, fees, post-forbearance repayment plans, and how information will be reported to credit bureaus.
- Obtain written confirmationEnsure all terms are documented in a formal agreement.
- Monitor your loan and credit reportsVerify correct coding of your account and review statements for accuracy. Report discrepancies promptly.
Case Study (Hypothetical for Illustrative Purposes)
Situation: Jane, a homeowner with a USD 250,000 mortgage at a 5% rate, is unexpectedly laid off and cannot afford her USD 1,340 monthly payment.Action: Jane contacts her mortgage servicer, submits her layoff notice, and applies for forbearance. She is granted a four-month payment pause.Outcome: About USD 4,166 of interest accrues over four months (USD 250,000 × 0.05 / 12 × 4). Jane works with the servicer to defer the missed amount to the end of her loan, extending the term rather than requiring a lump-sum payment.
Key Takeaways:
- Early communication provides more options.
- All terms should be confirmed in writing.
- Planning for post-forbearance payments is essential to avoid additional stress.
Resources for Learning and Improvement
Consumer Financial Protection Bureau (CFPB) Forbearance Guidance
Official Q&A, strategies, and rights for consumers.
https://www.consumerfinance.gov/U.S. Department of Housing and Urban Development (HUD)
Information on mortgage relief, FHA servicing policies, and foreclosure mitigation.
https://www.hud.gov/Federal Student Aid
Details about federal student loan forbearance and deferment.
https://studentaid.gov/Nonprofit Credit Counseling Agencies
Many accredited organizations offer free or low-cost counseling and webinars on forbearance and budgeting. Refer to the National Foundation for Credit Counseling (NFCC).Research Reports
- International Monetary Fund (IMF), Bank for International Settlements (BIS): Studies on loss mitigation and forbearance.
- U.S. Government Accountability Office (GAO): Analyses of the CARES Act's effect on borrower outcomes.
Educational Courses
- Massive open online courses (MOOCs) on consumer finance (Coursera, edX).
- Webinars from housing agencies and financial literacy nonprofits.
FAQs
What is forbearance on a loan?
Forbearance is a formal arrangement allowing a temporary suspension or reduction of loan payments for a set period, typically to help borrowers recover from temporary hardship and prevent default or foreclosure. It is not equivalent to debt forgiveness; interest usually accrues, and deferred payments must eventually be paid.
How does the forbearance process work?
You contact your servicer, provide documentation of hardship, and receive a written plan outlining terms, duration, interest management, and the process for resuming payments. During forbearance, payments are paused or reduced, but the obligation remains.
Who can qualify for forbearance?
Eligibility depends on the loan type, the investor’s or insurer's policies, and documented short-term hardship such as job loss, illness, or disaster. Some government programs set additional requirements regarding loan status and occupancy.
Does interest continue to accrue during forbearance?
In most situations, yes. Interest still accrues and may be added to the principal when forbearance ends, increasing the total cost. Certain federal student loan programs may waive interest for specified periods during crises.
How will forbearance affect my credit?
If managed according to agreement, most servicers report accounts as “current” or “in forbearance,” which typically avoids new negative marks. However, previous missed payments and the “forbearance” note can impact future lending decisions.
What is the difference between forbearance and deferment?
Forbearance suspends or reduces payments and interest usually accrues. Deferment can also delay payments, and sometimes interest is paused, such as with some subsidized student loans. Mortgage “deferral” often means moving skipped payments to the loan’s end, which may at times be interest-free.
How long can forbearance last?
The duration varies. Typical mortgage forbearance periods last 3–12 months, occasionally longer with extensions. Student loan forbearance is often granted in 12-month increments, subject to aggregate limits.
What happens when forbearance ends?
You must manage both the recommencement of regular payments and the repayment of paused amounts. Options may include a lump sum, repayment plan, extension of loan term, adding missed amounts to the end, or loan modification.
What are common pitfalls to avoid?
Common issues include not thoroughly reading agreements, misunderstanding interest accrual, missing insurance or tax payments, assuming automatic approval, and not planning adequately for payments after forbearance.
Conclusion
Forbearance offers a structured, lender-approved mechanism for borrowers facing temporary financial challenges. Its primary benefit is providing immediate cash-flow relief and helping to avert risks such as default or foreclosure. However, interest generally accrues, total costs may increase, and borrowers must plan for repayment after the forbearance period ends. Understanding all terms, securing written agreements, planning a manageable exit, and utilizing reliable resources are crucial to using forbearance effectively. Consider all available relief options and, if uncertain, consult credit counseling or financial advice. Forbearance can be a valuable tool when used responsibly and with careful planning for long-term financial stability.
