Mortgage Forbearance Agreements

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A forbearance agreement gives a borrower a pause from having to make mortgage payments for a short time. The lender then agrees to give up its rights to foreclose on the property during this pause. This article discusses what a mortgage forbearance agreement is and how it may be able to help homeowners facing challenging financial circumstances.

Many Americans are experiencing financial hardship triggered by the Covid-19 pandemic. Due to a loss of income, homeowners are struggling to pay their mortgage payments. With missed payments, they risk losing their homes through foreclosure. But, initiation of a foreclosure action doesn’t mean that all is lost. People who can’t afford to make their mortgage payments can often save their homes. There are options available.

One short-term option is a forbearance agreement, which gives a borrower a pause from having to make mortgage payments for a short time. The lender then agrees to give up its rights to foreclose on the property during this pause. This article discusses what a mortgage forbearance agreement is and how it may be able to help homeowners facing challenging financial circumstances.

What Is Mortgage Forbearance?

A mortgage forbearance agreement is an agreement wherein the lender agrees to suspend or reduce the mortgage payments that the borrower is required to make for a short period of time. Without a forbearance, the loan documents allow the lender to foreclose on a borrower’s house if the borrower misses monthly mortgage payments. During the forbearance period, the lender forbears or gives up its right to foreclose.

A forbearance agreement is a payment deferral plan. The homeowner defers making mortgage payments until a later date. After the forbearance period ends, the borrower must make up the missed mortgage payments due under the loan document. This includes principal, interest, and taxes. The borrower will also have to make the regular payments that become due after the foreclosure period ends.

If the missed payments are not made up after the forbearance period, the lender can exercise its right to foreclose. Forbearance periods range from 3 to 6 months. Some may be up to 12 months. This is only a short-term solution if a borrower is experiencing a sudden temporary financial hardship.

How Do I Make Up The Payments Missed Under A Forbearance Agreement?

As part of the forbearance plan, the borrower will be required to have a repayment plan. The repayment plan will outline how the missed mortgage payments will be repaid. There are various options available to the homeowner:

• Lump-sum repayments: This option can be challenging because the borrower will have to make one or several large payments to make up for all the missed payments after the forbearance period ends. This is usually only the best option available if homeowners opt to sell other property to make up their missed payments quickly. Fannie Mae and Freddie Mac-backed mortgages can’t require the missed payments to be repaid in one lump sum. Fannie Mae and Freddie Mac are federally backed home mortgage companies created by the U.S government.
• Payment plans: The borrower can repay the missed payments over time by increasing the amount of the regular payment. For example, if the regular monthly mortgage payment is $1,300, the monthly payment may be increased to $1,600 until all the missed payments are repaid. The homeowner will have to keep up with these payments to avoid foreclosure.
• Loan modifications: The borrower may seek to modify the terms of the loan document. Their interest rate may be reduced and the term of the home loan may be extended. Missed mortgage payments may be added to the end of the loan. Note that applying for a loan modification takes time. Also, homeowners who have entered into a forbearance may not be eligible for a refinance for some time. Exception: the Federal Housing Finance Agency (FHFA) has stated that Fannie Mae and Freddie Mac home loans may be able to refinance within three months of forbearance.
• Payment deferral option: This is available for homeowners with Freddie Mac and Fannie Mae home loans. The homeowner may opt to repay the missed payments when the house is sold, refinanced, or when the loan matures at the end of the loan. This option avoids an increase in the mortgage payment to repay missed payments.

Pros And Cons Of Mortgage Forbearance

This is a favorable option for those experiencing a short-term financial setback. It provides mortgage relief without the threat of foreclosure. The lender forbears its right to foreclose for a short time.

A forbearance avoids missed payments being reported to credit bureaus. Lenders report missed mortgage payments to the three credit reporting agencies, TransUnion, Equifax, and Experian. These credit bureaus will disclose the missed payments on your credit report. This reporting negatively affects your credit score and remains on your credit history for up to seven years.

Foreclosure is a long and expensive process. Lenders are willing to enter into forbearance agreements and provide borrowers with temporary mortgage relief to avoid foreclosures.

The disadvantage to forbearance is figuring out how to repay the missed payments. The options for repayment have financial consequences. Missed payments may be repaid by extending the term of the home loan. If you take this approach, your home loan will now need to be repaid over a longer duration. Missed payments may also need to be repaid in one large sum, which is difficult to do. Because payments were missed, the balance of the loan may be increased through unpaid interest.

Forbearance Agreements are only a band-aid. They offer temporary mortgage relief. Borrowers who experience financial hardships for longer than the term of the forbearance agreement will need to find a long-term permanent solution to their challenges, such as a loan modification.