Forbearance agreement refers to a contract used by mortgage lenders when borrowers are financially incapable of paying home loan installments. When mortgage forbearance contracts are in place the bank agrees to cease foreclosure action as long as borrowers comply with the terms.
A forbearance agreement temporarily suspends or reduces mortgage payments. On average real estate forbearance plans extend for 2 to 3 months, but banks can offer special financing terms for up to 12 months.
While forbearance agreements can help borrowers get back on track, it is vital to understand the risks involved. Banks require borrowers to submit the full amount of missed payments when the contract expires. If mortgage payments are $1,000 per month and borrowers miss four payments they must be financially capable of repaying $4,000. If mortgagors are unable to provide full payment the bank can move forward with foreclosure.
Mortgage loan installments are reported to the major credit bureaus. When borrowers enter into real estate forbearance the missed payments are reported as delinquent. Late payments reduce credit scores and can potentially place debtors into the high-risk category.
Individuals with bad credit will find it difficult to obtain credit of any type. Those who are approved will have limited credit lines and charged a higher rate of interest. Bad credit scores can prohibit borrowers from entering into mortgage refinance and may affect their ability to obtain other types of foreclosure prevention strategies such as loan modifications.
Another consideration is the affect missed payments will have on escrow accounts. Most home mortgage loans include funds for property taxes and homeowner’s insurance. A portion of each loan installment is placed into escrow to cover expenses.
If property taxes and insurance premiums are due during the forbearance contract the escrow account might not have adequate funds. Borrowers will be responsible for paying expenses out of pocket. If mortgagors do not pay property taxes and insurance, lenders can void the forbearance agreement and commence with foreclosure action.
With that being said, real estate forbearance contracts can offer financial relief and help borrowers become current with their home loan. Mortgagors must become hyper-vigilant with budgeting or finding ways to increase income to ensure they can pay the missed payments when their forbearance plan expires.
Mortgage forbearance is best suited for individuals experiencing temporary setbacks. Those who are facing long-term unemployment or extenuating financial problems should discuss available foreclosure prevention strategies with their lender before entering into a real estate forbearance contract.
Borrowers who wish to proceed with forbearance agreements must work with their bank’s loss mitigation division to obtain approval. Most lenders require mortgagors to provide financial records and a letter of hardship.
Hardship letters give mortgagors the opportunity to outline the events that caused them to fall behind on mortgage payments. It is best to include a chronological timeline and summarize each event, along with stating any action taken to rectify financial problems.
It is imperative for borrowers to contact their lender at the first sign of financial distress. Lenders are typically more willing to work with those who are proactive. If banks are unwilling to enter into forbearance agreements, borrowers may need to enlist the help of a real estate lawyer.
Last, but not least, the Department of Housing and Urban Development provides free foreclosure avoidance counseling to individuals struggling to make mortgage payments. HUD counselors can be beneficial in helping borrowers determine which foreclosure prevention strategies are best suited for their situation. To learn more about foreclosure assistance programs visit HUD.gov.