Rights and Responsibilities of Forbearance

The lender who agrees to a mortgage forbearance agreement chooses to refrain from exercising a legal right to foreclose on a mortgage. Instead of foreclosure, the lender negotiates different payment arrangements with the borrower. The borrower must continue full payment at the end of the forbearance period.

Borrowers may also be required to pay additional amounts to the lender such as the principal, accrued interest, outstanding taxes and insurance. Forbearance terms are not set, and these may vary depending on the lender, whether the lender is an institution or an individual. The lender may agree to a forbearance until the borrower's financial situation becomes more stable.

While mortgage forbearance helps a struggling homeowner, it is not a long-term solution for borrowers. It is a temporary measure for when borrowers may have events such as unexpected unemployment or health problems. Borrowers who have deeper financial problems should seek solutions other than a forbearance agreement.

Why Borrowers May Need a Forbearance Agreement

There are several reasons why borrowers may need a mortgage forbearance agreement such as unexpected unemployment or other loss of income, or a prolonged illness that takes up their finances. In forbearance agreements, there are several solutions such as loan modifications, forbearance plans, and repayment plans.

Loan Modification

A loan modification is a change in the loan terms. For example, the lender may lower the monthly amount the borrower pays. However, the borrower must pay on time. Generally, the borrower must show the lender that certain criterion makes the modification necessary. The criteria can be evidence that it is hard for the borrowers to make current mortgage payments because of financial hardship and documentation for evaluation and judgment. A trial period can show that the borrower can afford the new monthly amount.

There are several types of loan modification including Fannie Mae and the Freddie Mae Flex Modification program. Some lenders use their own, proprietary, loan modifications. With these modifications, the lender has several options such as reducing the interest rate or converting a variable interest rate to a fixed interest rate. The lender may opt to reduce the borrower's monthly payments. Any loan modification will require documentation. Some approved documentation types are:

  • A financial statement
  • Proof of income
  • Current tax returns
  • Bank statements
  • A hardship statement detailing your reasons for needing the forbearance modification

Forbearance Agreement

A lender in a forbearance agreement agrees for the borrower to miss or reduce payments for a certain period. The borrower must pay back the amount, plus interest, taxes, and insurance.

Repayment Plans

The third option for a borrower who has missed mortgage payments is a repayment plan. A repayment plan is an agreement to spread the amount that is past due over an agreed period. The repayment plan works by the lender and borrower agreeing to add a portion of the overdue amount to current payments until the borrower is caught up on payments.

After the borrower catches up with payments, the mortgage payments are paid as usual. The advantage of a repayment plan is that it allows the borrower to pay off the past due amount gradually. The length of the repayment period depends on the amount past due and how much the borrower can pay each month. A typical length of a repayment period is three to six months.

In any mortgage agreement including a forbearance, the borrower should acknowledge that they have defaulted on their obligations. At the same time, the lender agrees to refrain from exercising remedies for the defaults, meaning foreclosing on the property. The mortgage forbearance is valid as long as the borrower performs the new conditions set out in the forbearance agreement by making the required payments. Both the lender and the borrower are obligated to keep to the terms of the new agreement.

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