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What Is a Forbearance Agreement?
A forbearance agreement is made between a mortgage lender and a borrower that has gone delinquent on the repayment terms. In this agreement, the lender agrees not to foreclose on the mortgage, while the delinquent borrower agrees to a revised mortgage plan that will bring them current on the owed payments. A mortgage forbearance agreement will often suspend or reduce the payments for a period of time, allowing the borrower to fulfill the mortgage obligation without having the property foreclosed on by the lender.
If you have ever wondered what a mortgage forbearance is, understanding how this option works may benefit you if you struggle to make your monthly mortgage payments due to a financial struggle. A mortgage forbearance agreement can be a viable short-term solution to a financial challenge, but the borrower must follow the timeline and adhere to the guidelines to avoid foreclosure on the property.
Mortgage Forbearance Requirements
In order to qualify for home loan forbearance, a borrower must meet certain criteria. They must be able to provide the financial hardship they have encountered, whether due to the loss of income, a disaster that has damaged or destroyed the property, or a health problem that has impacted their financial situation. The borrower must be able to submit proof of the hardship that has affected their ability to repay the mortgage loan. Some lenders also require borrowers to request mortgage forbearance within a certain number of days or weeks after the hardship has occurred.
A lender may request proof of financial hardship, so it's helpful to gather any necessary documentation before beginning the forbearance process. The borrower may need to provide:
- Mortgage statements
- Additional debt statements (Auto loans, student loans, additional mortgage loans, credit card statements)
- Income details (Tax returns, pay stubs, proof of other income)
What Is a Forbearance Plan?
If you have trouble making the agreed-upon payments on your mortgage loan due to a job loss, change in employment, health issue, or another problematic financial situation, you may qualify with your lender for a mortgage forbearance plan. The lender will create this plan, which includes an agreement on their end to not foreclose on your property as long as you agree to repay the loan on adjusted terms. During the forbearance period, the lender legally cannot foreclose on the property unless you do not meet your end of the agreement.
A forbearance plan may pause the monthly payments entirely or adjust the payment amount required. At the end of the period, the borrower must resume the full payment as agreed upon in the forbearance agreement. Additionally, the borrower will often have to pay an additional fee to become current on the payments missed during the forbearance period. This additional amount includes any applicable taxes and insurance, as well as the principal and interest.
Here is an example of a forbearance agreement, provided by the SEC.
Benefits of Mortgage Forbearance
If a borrower is on the verge of missing a payment or multiple payments, this can create a financial problem that impacts their credit score. Missing multiple payments can also result in a foreclosure, which damages the credit score and leaves the borrower without a place to live.
Mortgage forbearance is less damaging to the credit score than a foreclosure and can create a plan that allows the borrower to get back on track in repaying the loan. Some lenders agree not to report on the missed payments under a forbearance agreement, so the borrower's credit isn't impacted. When a short-term or temporary challenge arises, a borrower can use this option to suspend or lower the payment, providing time to improve their financial situation and resolve the issue.
Mortgage Forbearance Length
Mortgage forbearance is designed to be a short-term solution for temporary financial struggles experienced by the borrower. The length of the forbearance agreement mortgage ultimately depends on the lender and the terms of the loan, and there isn't a one-size-fits-all option because of the different factors in play. The lender, type of loan, and investor or owner requirements in the loan can all impact the forbearance options available to the borrower.
One example of a mortgage forbearance plan is a six-month paused payment option, which allows the borrower to stop paying on the mortgage for six months. However, this option often requires the borrower to pay the six months of mortgage payments at the end of the term, resulting in one large forbearance payment coming due. Interest on the paused amounts also continues to accrue.
A lender may be able to assist a borrower with a solution that adds the owed payments during the paused period to the end of the loan. Some borrowers choose to take out an additional loan to cover the owed payments, although this option depends on the borrower's financial situation and credit history.
If a borrower is able to pay something, a lender may offer a mortgage forbearance reduction plan, which lessens the amount due each month. In this case, the amount reduced could be spread out over a longer-term period, such as over 12 months, thus increasing the mortgage payment amount for that period of time.
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Mortgage Forbearance Agreement vs. Loan Modification
A forbearance agreement differs from a loan modification in that the agreement is only for a short period of time. A loan modification is an option for borrowers who are unable to afford their monthly payment due to a change in the interest rate or other aspect of the loan, not due to a financial hardship that may be a short-term problem for the borrower.
A loan modification agreement allows the lender to work with the borrower to reduce the monthly payments going forward by:
- Reducing the interest rate
- Extending the length of the term of the loan
- Converting a variable interest rate to a fixed interest rate
These options available to borrowers are meant to help those who aren't able to make their monthly payments, creating a permanent solution to an ongoing financial problem. In order to qualify for a loan modification, a borrower must demonstrate an inability to make the current payment on the mortgage loan due to financial hardship, as well as provide proof that they would be able to afford the modified monthly payment amount. This demonstration of the ability to pay often comes in the form of a trial period.
Lenders considering a loan modification will also require documentation, which may include:
- Financial statements
- Tax returns
- Bank statements
- Proof of income
- Statement of financial hardship
A lender may also offer a loan modification as an option at the end of the mortgage forbearance period if the borrower is eligible.
How To Request Mortgage Forbearance
A borrower can request information about mortgage forbearance by contacting the lender and asking for additional details and options available to them under the terms of the loan. Some lenders require that the forbearance process be started within a certain period of time after a qualifying event, such as a disaster, health problem, or job loss.
The federally funded “Hardest Hit Fund” also provides assistance to homeowners throughout the U.S. It may include options like a reduction in the principal amount owed, assistance in transitioning out of a home into a more affordable living situation, or mortgage payment assistance for those who are underemployed or unemployed. Here is additional information about the Hardest Hit Fund by state.
The purpose behind a forbearance plan is to help the borrower avoid foreclosure during a temporary financial hardship that renders them unable to make the monthly payments on the loan. This article provides additional detail on mortgage forbearance agreements. When drafting a forbearance agreement, consult with a lawyer to ensure it covers all necessary elements.
Meet some of our Forbearance Agreement Lawyers
Donya G.
I am a licensed and active NY and CT Contracts Attorney, with over 20 years of diverse legal and business experience. I specialize in reviewing, drafting and negotiating commercial agreements. My practice focuses on working with small business clients as well as clients from international brokerage firms on acquisitions, especially in the Ecommerce space; drafting, negotiating, reviewing and advising on business agreements; ; breach of contract issues, contract disputes and arbitration. I am licensed to practice in New York and Connecticut, and am a FINRA and NCDS Arbitrator. My experience includes serving as General Counsel to small businesses. This entails reviewing, updating and drafting contracts such as employments agreements, asset purchase agreements, master services agreements, operating agreements and a variety of business and commercial contracts. Additionally, I assist clients with business strategies, contract disputes and arbitration. My diverse experience allows me to give my clients a well-rounded approach to the issues they face. I have been at top AML law firms; a Vice President at an Investment Bank, a Civil Court Arbitrator presiding over cases in contract law, commercial law, a Hearing Officer, presiding over cases and rendering written decisions, and a Judicial Clerk to a Civil Court Judge. It would be a privilege to assist you and your business with my services.
Daehoon P.
Advised startups and established corporations on a wide range of commercial and corporate matters, including VC funding, technology law, and M&A. Commercial and Corporate Matters • Advised companies on commercial and corporate matters and drafted corporate documents and commercial agreements—including but not limited to —Convertible Note, SAFE, Promissory Note, Terms and Conditions, SaaS Agreement, Employment Agreement, Contractor Agreement, Joint Venture Agreement, Stock Purchase Agreement, Asset Purchase Agreement, Shareholders Agreement, Partnership Agreement, Franchise Agreement, License Agreement, and Financing Agreement. • Drafted and revised internal regulations of joint venture companies (board of directors, employment, office organization, discretional duty, internal control, accounting, fund management, etc.) • Advised JVs on corporate structuring and other legal matters • Advised startups on VC funding Employment Matters • Drafted a wide range of employment agreements, including dental associate agreements, physician employment agreements, startup employment agreements, and executive employment agreements. • Advised clients on complex employment law matters and drafted employment agreements, dispute settlement agreements, and severance agreements. General Counsel • As outside general counsel, I advised startups on ICOs, securities law, business licenses, regulatory compliance, and other commercial and corporate matters. • Drafted or analyzed coin or token sale agreements for global ICOs. • Assisted clients with corporate formations, including filing incorporation documents and foreign corporation registrations, drafting operating and partnership agreements, and creating articles of incorporation and bylaws. Dispute Resolution • Conducted legal research, and document review, and drafted pleadings, motions, and other trial documents. • Advised the client on strategic approaches to discovery proceedings and settlement negotiation. • Advised clients on employment dispute settlements.
Ivan B.
I grew up in Beaumont, Texas. I attended Baylor University for college and the The University of Texas School of Law for law school. I gained extensive experience in many areas of transactional law through my former position as corporate counsel at National Western Life Insurance Company and my current position as an Associate at Nance & Simpson, LLP.
August 10, 2023
Amy F.
As a lawyer of 27 years, I have a great deal of experience handling many different types of legal projects. Starting with a simple estate plan or the purchase of a personal residence, and moving all the way to complex estate plans and real estate transactions. I regularly advise small business owners and real estate investors.
August 10, 2023
Georgie A.
Trusted contracts attorney specializing in real estate and business law. I handle leases, land purchase contracts, investment valuations, cease and desist letters, and operating agreements.
August 10, 2023
Matthew G.
I am a Berkeley Law 2020 graduate. I have experience working in finance and operations, plaintiff and defense litigation, and have been involved in multiple start-ups.
August 10, 2023
Jeanilou M.
Jeanilou G.T. Maschhoff has over 20 years of comprehensive business operations, finance, and development experience in addition to being a licensed attorney in California and Hawaii. She zealously works as a Trusted Advisor, Business/Brand Consultant, and Advocate for small businesses, non-profit organizations, and personal brands. She is dedicated to helping female business owners and professionals in the entertainment, beauty, fashion, and wellness industries make their goals a reality. She uses her diversified expertise to provide a holistic approach to addressing business and legal needs. Acting as a trusted advisor and outsourced general counsel, she assists on an array of business and personal matters. Passionate about social justice and assisting underrepresented populations, Jeanilou started her legal career working in the non-profit sector working towards access to justice and gender equity. She continues to assist non-profit organizations in many capacities and actively looks to partner businesses with charitable causes, creating a synergistic effect that benefits not only the organizations involved but our society as a whole. As an early adopter of the virtual practice of law, Jeanilou has been assisting law firms and solo practitioners adjust to the remote delivery of legal services and helping businesses explore Web 3.0.
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