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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
I joined Enterprise Law Group, LLP as an Associate in March 2020. My practice has involved a wide range of legal matters from commercial real estate, finance and international business transactions to litigation matters including commercial disputes, personal injury and medical malpractice. Proficient in Spanish, I graduated from the University of Kentucky College of Law, the Patterson School of Diplomacy and International Commerce, and the University of Southern California. Prior to my legal career, I sought diverse professional experiences. After graduating from college, I orchestrated my own volunteering experience in southern Peru with a small non-profit organization. Later I gained valuable professional experience as part of a U.S. Senate campaign, and after that I joined the public policy team at Greater Louisville, Inc., Louisville's Chamber of Commerce affiliate. Prior to law school, I embarked on a month long excursion with the Northern Outdoor Leadership School in Alaska, which gave me a new found appreciation for sustainability.
Agnes Mombrun Geter is the Founder and Managing Attorney of Mombrun Law, PLLC. She is an experienced attorney and is a member of the Florida Bar, New Jersey Bar, and the Pennsylvania Bar. The firm's practice focuses on Estate Planning, Business Law, and Debt Settlement including IRS Debt Relief. The firm's goal is to simplify the law and provide clients with the confidence and information necessary to make their decisions. The firm also provides project-based legal services to other attorneys and law firms, along with assisting as personal counsel and local counsel on legal matters.
Have over 40+ years of corporate and commercial law experience.
I am a business attorney with years of experience advising individual entrepreneurs and small businesses on issues ranging from entity selection/formation to employment law compliance, to intellectual property protection and exploitation. I often act as General Counsel for my clients fulfilling the legal function as part of a team of managers. I look forward to learning more about your business and how I may be of assistance.
Corporate and transactional attorney in sixth year of practice. Focus areas include general corporate counsel, labor and employment law, business partnership matters, securities matters related to privately-held companies, and regulatory compliance in securities and finance matters.
Forest is a general practice lawyer. He provides legal advice regarding small business law, contracts, estates and trusts, administrative law, corporate governance and compliance. Forest practiced complex commercial litigation in Florida for eight years, representing clients such as Host Marriott, Kellogg School of Business, and Toyota. Since moving to Nashville in 2005, he has provided legal advice to clients forming new businesses, planning for the future, and seeking funding through the use of equity and/or debt in their businesses. This advice has included the selection of business type, assistance in drafting and editing their business plans and offering material, reviewing proposed term sheets, and conducting due diligence. Forest is a member of the Florida, Tennessee, and Texas Bars; in addition. Forest has held a Series 7, General Securities Representative Exam, Series 24, General Securities Principal, and Series 63, Uniform Securities Agent State Law.
FL & NY licensed attorney with nearly a decade of experience in intellectual property, commercial contracts, employment, and data privacy and security. Basically, everything your business needs!