A forbearance agreement is sometimes offered to borrowers who are struggling to meet their home loan obligation and those who are in a prior foreclosure. When lenders enter into a real estate forbearance contract, they agree not to proceed with the foreclosure action as long as the mortgagors comply with the terms.
The forbearance agreement allows borrowers to obtain special financing conditions for a specified period of time. The average duration of mortgage forbearance contracts is usually 2 or 3 months. However, banks can extend terms up to 12 months when there are extenuating circumstances.
Although a mortgage forbearance agreement can help borrowers obtain 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 able to repay the amount of the late or reduced payments.
For example, if a borrower’s monthly home loan payment is $1,200 and their lender reduces the payment to $600 over 4 months, they should be able to pay $2,400 at the end of the forbearance agreement. If you are unable to pay the full amount, the lender may proceed with a foreclosure action.
Additionally, home loan payments are reported to the three major credit bureaus Equifax, Experian, and TransUnion. Deferred payments are often reported as delinquent, which can have an adverse effect on borrowers’ credit scores.
Those who are already in a low credit tier can quickly move into the high risk category, which can limit your ability to obtain credit in the future. Bad credit can prevent borrowers from qualifying for other types of foreclosure prevention strategies, such as loan modifications and mortgage refinancing.
Another concern of real estate forbearance is the effect that deferred payments have on the escrow. Home mortgage loans incorporate funds needed for homeowners insurance and property taxes. A portion of each installment is deposited in escrow to cover annual expenses.
If insurance premiums or property taxes are due during the forbearance plan, the escrow account may fall short. Mortgages are responsible for paying these out-of-pocket expenses. If property insurance and taxes are not paid, banks can void the forbearance agreement and initiate foreclosure proceedings.
With that 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 pay deferred payments once the plan expires.
Borrowers facing chronic financial problems due to long-term unemployment, health problems, divorce, or death of a spouse should contact their lender’s loss mitigation department to discuss foreclosure prevention strategies.
Mortgages must obtain authorization from their lender to enter into forbearance. Most banks require borrowers to submit financial documents and a hardship letter.
Hardship letters give borrowers the opportunity to provide details of the events that caused their financial crisis. Lenders generally require mortgagors to provide a timeline and summary of difficulties, along with any actions taken to improve finances.
Borrowers should contact their mortgage provider at the first sign of financial difficulty. Banks are often more willing to work with mortgagors who are proactive in finding solutions. If lenders are unwilling to provide assistance, borrowers may need to retain the services of a real estate attorney.
