Forebearance

A mortgage forbearance agreement is a contract between a mortgage lender and a borrower wherein the lender agrees not to foreclose on the home and the borrower agrees to a plan that eventually gets them caught up on their monthly payments.

In the contract, the lender may reduce the borrower's monthly payments or even suspend them entirely for a set period. Through a plan set by the lender, the borrower promises to get up to date on their monthly payments by the end of that timeframe.1

In exchange, the lender agrees not to foreclose on the home, which is its legal right in the event of a delinquent mortgage loan.

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.

If the borrower's financial situation hasn't improved by the end of the agreement, the lender may choose to extend it. However, this decision and other aspects of a mortgage forbearance agreement can vary based on the lender and the circumstances.

Mortgage forbearance agreements are typically reserved for short-term financial difficulties that are expected to be resolved sooner rather than later.

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.

Pros

○ 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

Cons

○ Missed payments must be repaid
○ Doesn't solve long-term financial problems
○ Can still damage your credit

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.