A forbearance agreement is sometimes offered to borrowers struggling to meet their home loan obligation and those entering into preforeclosure. When lenders enter into a real estate forbearance contract they agree not to proceed with foreclosure action as long as mortgagors remain in compliance with the terms.
The forbearance agreement allows borrowers to obtain special financing terms for a specific period. The average duration of mortgage forbearance contracts is usually 2 or 3 months. However, banks can extend the terms for up to 12 months when extenuating circumstances exist.
While a mortgage forbearance contract can assist borrowers in getting their finances to meet future loan obligations, there are risks with this type of agreement. Using the forbearance agreement, banks temporarily reduce or suspend mortgage payments. Once the agreement expires, borrowers must be financially capable of repaying the amount of missed or reduced payments.
For example, if a borrower’s monthly home loan installment is $1200 and their lender reduces the payment to $600 for 4 months, they must be able to repay $2400 at the end of the forbearance contract. If unable to pay the full amount, the lender can proceed with a foreclosure action.
Additionally, home loan payments are reported to the three major credit bureaus of Equifax, Experian, and TransUnion. Deferred payments are often reported as delinquent, which can hurt borrowers’ credit scores.
Those who are already in a low credit bracket can quickly slide into the high-risk category, which can limit their ability to obtain credit in the future. Bad credit can prohibit borrowers from qualifying for other types of foreclosure prevention strategies such as loan modifications and mortgage refinance.
Another concern of real estate forbearance is the effect deferred payments have on escrow. Home mortgage loans incorporate required funds for homeowners insurance and property taxes. A portion of each installment is placed into escrow to cover annual expenses.
If insurance premiums or property taxes become due during the forbearance plan the escrow account may come up short. Mortgagors are responsible for paying these expenses out of pocket. If property insurance and taxes are not paid, banks can void the forbearance agreement and initiate foreclosure proceedings.
With that being said, mortgage forbearance can be a good option for those facing temporary financial setbacks. Borrowers must be extremely proactive in getting financial affairs in order during the contract period to ensure they can afford deferred payments once the plan expires.
Borrowers facing chronic financial problems due to long-term unemployment, health problems, divorce, or the death of a spouse should contact their lender’s loss mitigation department to discuss foreclosure prevention strategies.
Mortgagors must obtain authorization to enter into mortgage forbearance from their lender. Most banks require borrowers to submit financial documents and a letter of hardship.
Hardship letters provide borrowers with the opportunity to provide details of events that caused their financial crisis. Lenders typically require mortgagors to provide a chronological timeline and summary of hardships, along with any action taken to improve finances.
Borrowers must contact their mortgage provider at the first sign of financial hardship. Banks are usually more willing to work with mortgagors who are proactive in finding solutions. If lenders are unwilling to assist, borrowers may need to retain the services of a real estate attorney.
by Simon Volkov