What Is a Mortgage Forbearance Agreement?
A mortgage forbearnce agreement is an agreement made between a mortgage lender and a delinquent borrower. In this agreement, a lender agrees not to exercise its legal right to foreclose on a mortgage, and the borrower agrees to a mortgage plan that will—over a certain time period—bring the borrower current on their payments.
The coronavirus outbreak triggered forbearance help beginning March 18, 2020. Legislation and policies in the wake of the 2020 economic crisis have sought to offer relief to homeowners struggling to make mortgage payments since then.
How Does a Mortgage Forbearance Agreement Work?
A mortgage forbearance agreement is designed for homeowners who are struggling to keep up with their monthly payments. The borrower can contact the lender and discuss a forbearance agreement in which the monthly payment is reduced or suspended, depending on the borrower’s financial situation.
During that time, the lender agrees not to foreclose on the home, which would involve the lender repossessing the home and selling it to recoup the amount of the loan. A foreclosure can have a significant negative impact on the borrower’s credit score.
After the forbearance period is over, the borrower will continue to make regular monthly payments plus a lump sum or an additional monthly amount to get caught up on their loan repayment schedule. That includes both principal and interest, as well as property taxes, homeowner’s insurance, and mortgage insurance, if applicable.
For example, let’s say your monthly payment is $1,000 and you get on a six-month forbearance plan. You may need to pay the $6,000 in payments you missed in a lump sum at the end of the forbearance period or over several installments as determined by your lender. For instance, you might pay $200 more per month over 30 months or $100 per month over 60 months.
Do I Need a Mortgage Forbearance Agreement?
A mortgage forbearance agreement may be right for you if you’re experiencing short-term financial difficulties and can’t keep up with your mortgage payments. Short-term financial hardship can occur if you’ve recently experienced a job loss, major injury or illness, or natural disaster.
While a mortgage forbearance agreement isn’t ideal, it can be a good way to avoid foreclosure for a situation that you expect will improve.
Remember, though, that you’re still on the hook for the payments you’ve missed once the forbearance period ends, so it’s generally not a good idea if you anticipate long-term financial struggles.
Alternatives to a Mortgage Forbearance Agreement
If you’re having a hard time keeping up with your monthly payments, there are some other ways that you can get the solution you need.
Loan Modification Agreement
Unlike a mortgage forbearance agreement, a loan modification agreement is a long-term solution for a mortgage loan that’s become unaffordable. With a loan modification agreement, the lender may agree to lower the loan’s interest rate, convert the rate from variable to fixed (so it doesn’t fluctuate over time), or even extend the loan’s term.2 One or more of these changes can be made to make the monthly payments more affordable for the borrower.
Because a loan modification agreement is a permanent solution, borrowers are required to meet certain requirements to qualify. For starters, they must show that they can’t afford their current monthly payments by providing financial statements, pay stubs, tax returns, and a hardship statement.
Borrowers also must show that they can afford the new monthly payment during a trial period, after which time the lender may choose to change the loan’s terms for the remainder of the repayment plan.
Depending on your situation, you may be able to refinance your loan with a new mortgage offering better terms and a lower monthly payment. You might even turn some of your equity into cash, which you can use to pay other bills or debt that may be stretching your budget. A refinance is not free, however. You will pay fees and closing costs, much as you would with a new mortgage, which can add up the 3%-6% of the remaining balance on your mortgage.
Sell the Home
If you’re in a situation where your financial hardship is more long-term and neither a forbearance nor modification agreement will help, selling the home can help you avoid the negative credit impact of foreclosure.
This process can take time, so you may still need to communicate with your lender about the situation and make some adjustments to your payment plan. But it can help you get out of your mortgage more cleanly and potentially even help your financial situation if you have equity in your home.
Pros and Cons of a Mortgage Forbearance Agreement
- Gives you time to get back on your feet financially
- May allow you to stay in your home
- Has a lower negative impact on your credit than a foreclosure
- Missed payments must be repaid
- Doesn’t solve long-term financial problems
- Can still damage your credit
- Gives you time to get back on your feet financially: Depending on the situation, you may be able to get forbearance for one month, several months, a year, or even longer.
- May allow you to stay in your home: If your request is approved and you meet all the requirements set by the lender, a forbearance agreement can help you stave off foreclosure.
- Has a lower negative impact on your credit than a foreclosure: In some cases, the lender may choose to report that you’re not making payments as originally agreed, which can impact your credit. That said, it’s generally not as damaging as a foreclosure.
- Missed payments must be repaid: You’ll either need to get caught up with a lump-sum payment or an increased monthly payment over time. If your financial situation doesn’t improve enough that you can afford that, foreclosure may be the end result anyway.
- Doesn’t solve long-term financial problems: A mortgage forbearance agreement is designed to help short-term financial hardship. If you don’t think you’ll be able to get back on track financially by the end of your forbearance period, consider other options.
- Can still damage your credit: Even if it’s not a foreclosure, a forbearance agreement signals to other creditors that you may be a risky borrower. If it’s reported to the credit bureaus, your credit score may go down, and you may have a hard time getting approved for other forms of credit in the future.
Is a Mortgage Forbearance Agreement Worth It?
If your financial difficulties are truly short-term in nature and you expect that you can meet the lender’s requirements to move forward, a forbearance agreement can be a great way to keep your home and avoid foreclosure.
However, delaying monthly payments with no plan of getting caught up can ultimately make things worse for you. So it’s important to consider your financial situation and consult with your lender to determine the best path forward.
What It Means for Your Budget
If you’re experiencing financial hardship, a mortgage forbearance agreement can relieve some of the pressure on your budget so you can get back on your feet. It can help you put food on the table and cover other necessary expenses.
Once the forbearance period ends, though, you’ll need to get caught up on the payments you missed. Depending on the situation, this may mean cutting back in other areas of your budget so that you can satisfy the lender’s requirements for the agreement and avoid foreclosure.
How To Get a Mortgage Forbearance Agreement
To request forbearance on your mortgage loan, contact your loan servicer directly. Ask about the documentation you’ll need to provide to show that you need a forbearance, such as pay stubs, medical bills, a job layoff letter, and others.
Get the agreement in writing and read it thoroughly before you sign it. Make sure you can afford the terms of the agreement once your forbearance period ends so you don’t end up in a worse position than you started.