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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
Founder and Managing partner of Emerald Law, PLLC, a business law firm specializing in contract drafting and corporate transactions. Kiel worked as in house counsel for a variety of companies before launching his own firm, and most recently served as the Chief Legal Officer for an international private equity firm.
Jay Pink is an attorney who works with businesses and families on estate planning, and business law matters. Having his CPA license, and working in multiple family businesses over his career has positioned him to provide valuable insight on successful business operations. He has formed many entities - LLC's, Corps Partnerships and non-profit organizations.
Skilled in the details of complex corporate transactions, I have 15 years experience working with entrepreneurs and businesses to plan and grow for the future. Clients trust me because of the practical guided advice I provide. No deal is too small or complex for me to handle.
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I am an experienced technology contracts counsel that has worked with companies that are one-person startups, publicly-traded international corporations, and every size in between. I believe legal counsel should act as a seatbelt and an airbag, not a brake pedal!