Forbearance is an olive branch offered by a lender to delay collecting a debt. Often, it’s a short period of time and comes with an increased cost for the borrower.
A mortgage forbearance agreement offers this brief respite for homeowners who meet financial hardship. These agreements are a grace period to help you get your finances in order and keep your house.
Has a recent difficulty made it difficult to make your mortgage payments and nothing seems to help? Keep reading to learn how to put your loan into forbearance and find some necessary breathing room for your finances.
What Is a Mortgage Forbearance Agreement?
When you enter a mortgage contract with a lender, you agree to pay back the money you owe on a specified date every month for the term of the loan.
Missing one payment makes you delinquent. Even making the payment later than scheduled – without prior agreement from the lender – leads to delinquency.
Once you become delinquent, your lender is legally allowed to begin proceedings to collect the payment. However, they cannot start the foreclosure process until 121 days after missing your payment.
Foreclosure isn’t a necessity. A forbearance is an option first.
What does forbearance mean?
Forbearance agreements are contracts drawn up between a lender and a borrower where the lender agrees to hold off on foreclosing despite the borrower’s delinquency.
The agreement gives you time to play catch up, find your breath, or come up with a new plan to keep or even carefully let go of your property.
Who Qualifies for Forbearance?
Not all mortgages are eligible for forbearance. You may only apply if your mortgage is:
- Owned by Freddie Mac
- Owned by Fannie Mae
- Insured by the FHA
Don’t have a relationship with one of these institutions? Other options like refinance may still be available.
What Happens During Loan Forbearance?
Loan forbearance is a short period where the lender agrees to:
- Reduce or suspend payments
- Not initiate foreclosure proceedings
At the end of forbearance, the bank expects you to pick up where you left off and start making full payments again. You’ll also make a higher payment to help catch up on the amounts you missed. How significantly this alters your monthly balance depends on:
- Number of payments due
- Interest rate
- Principal balance
- Terms of the forbearance agreement
Each borrower’s situation is unique, so talk to your lender to find out what might be available to you.
What’s the Difference Between Forbearance and Loan Modifications?
Mortgage forbearance is a short-term relief program that takes payments off the table and allows you to re-group. Once the period ends, everything goes back to normal, bar the temporary changes to your payment to catch up on money owed.
Loan modifications differ significantly. Changes made through the modification process are permanent.
Both forbearance and modifications are options for people who can’t presently afford their monthly payments. However, modifications don’t provide the same kind of relief offered by forbearance.
When you choose a loan modification, you work with the lender to change parts of the loan to make them more favorable to you. It might include changes to:
- Interest rate
- Variable to fixed interest rate
- Extended term length
Each of these has the potential to lower your monthly payments permanently.
How to Apply for a Forbearance Agreement
Are you ready to apply for a mortgage forbearance agreement? Read this guide to the step-by-step application process.
1. Decide that Forbearance Is Right for You
Once you begin paying back a mortgage, a variety of financial tools become available to you to help manage your finances. Forbearance offers temporary relief from your mortgage payments when you go through a short-term, provable financial hardship.
Ultimately, it helps you stay in your home while you weather the storm.
Still, forbearance isn’t right for everyone. The plan doesn’t offer payment forgiveness. It only provides leniency in paying back missed payments. When the plan starts up again, you’ll pay both your regular payments and additional money to cover the payments previously missed.
If your financial situation looks to extend into a long-term issue that will require serious sacrifices to recover from, then forbearance may not be your best option. You may still risk losing your house if you default on your agreed repayment plan.
2. Determine Your Eligibility
Not all loans are eligible for forbearance.
Banks tend to offer leniency to borrowers who otherwise make on-time payments and for whom financial hardship is both new and temporary. Additionally, you’ll need to be able to prove your financial hardship. Buying a house for more than you can afford doesn’t count. Finally, accepting terms like an adjustable-rate mortgage that grew to an uncomfortable rate is also ineligible.
Financial hardships tend to include:
- Job loss or layoffs
- Paycuts or loss of income
- Death of a breadwinner
- Serious illness
Additionally, not all mortgages are eligible. FHA, Fannie Mae, and Freddie Mac loans are all eligible, but conventional mortgages might not be.
3. Contact Your Lender to Talk About Your Finances
Once you determine that the risks are worthwhile and you are likely eligible for your loan, the next step requires getting in touch with your lender.
Visit your loan officer in person if you can or contact them by phone. Whether you call or go into the office, you’ll need to be ready to discuss why you believe a forbearance agreement is best and whether you’re eligible.
Prepare to discuss the financial hardship that put you in the situation and the ways you’ve tried to remedy it. You’ll likely need to be able to provide some proof before moving forward.
4. Request a Mortgage Forbearance Agreement
If both you and your lender agree that you are eligible for forbearance and it’s a good idea, you put in a formal request.
The request will come back with a significant amount of forms and other paperwork to complete. Ask for it to be sent to you as soon as possible either by fax or by mail.
Your bank will also follow up with an information request looking for formal proof that you encountered a hardship.
5. Hand Over Supporting Financial Documents
The process moves faster when you can provide plenty of evidence of your current financial state before the bank asks. Whether you’re thinking about forbearance or another type of relief, start gathering documents related to your finances before contacting your bank.
It not only gives you a better picture of your finances when you first pitch the idea to the bank, but it helps you sort through your options before approaching them.
In many cases, a lender asks for documents like:
- Paycheck stubs
- Unemployment compensation award letter
- Recent bank statements
- Tax returns
- List of assets and debts
- Medical bills
Your bank might also ask for a statement describing the issue you face or a description of how you’ve tried to manage your finances to avoid defaulting on your mortgage.
6. Check-In Regularly and Talk to HUD
As you move forward, you receive a referral to the loss mitigation department of the lender. From here, you should check in regularly with your lender or keep in touch with the FHA National Servicing Center, who will help with your lender.
If you encounter difficulties, ask a counselor for help The Department of Housing and Urban Development (HUD), who oversee the FHA, offer housing counselors who help navigate the forbearance process. It’s possible to direct issues with lenders here.
7. Negotiate with Your Assigned Loan Officer
You may negotiate the terms of your forbearance agreement to give you enough time to get back on your feet. In most cases, you provide a timeframe that makes sense for your financial situation. It’s important to request enough time to return to a normal payment schedule to avoid ending up in trouble again.
8. Review the Terms of the Agreement and Re-Negotiate the Terms
Loan advisors use your terms to write up a forbearance agreement, but the bank may have other ideas based on your financial history.
The terms of your agreement get sent back to you to review, but it’s not necessary to sign them. If the terms don’t work in your favor, go back to the negotiating table with your loan advisor to secure a more favorable and affordable agreement.
9. Sign and Accept the Mortgage Forbearance Agreement
When you’re ready and confident that you have the best agreement possible, go ahead and sign the mortgage forbearance agreement.
From here, you must follow the terms of the agreement and in exchange, the lender won’t initiate foreclosure proceedings.
Find Forbearance for Temporary Relief
A mortgage forbearance agreement gives you a break when life gets unexpectedly difficult. By relieving you from a few months of payments, you receive a grace period for catching up.
Eventually, however, you have to return to making those payments – plus the ones you missed.
Mortgage forbearance isn’t for everyone, and not everyone is approved despite financial hardship. If you’re one of those people, you still have options. Selling your house may help you relieve the burden and start over without destroying your credit.
Do you need to get out from under your mortgage quickly? Contact us today to discuss ways to sell your home for cash.