subject: Using a Forbearance Agreement to Stop Foreclosure [print this page] Lenders sometimes offer a forbearance agreement to borrowers who have fallen behind in mortgage payments due to temporary financial problems. When banks enter into real estate forbearance contracts they cannot commence with foreclosure action unless mortgagors default on the terms.
A forbearance agreement grants mortgagors special financing arrangements for a predetermined timeframe. Banks can reduce or suspend mortgage payments for up to 12 months. However, most lenders only extend forbearance plans for 2 to 3 months. Borrowers must be able to repay missed or reduced payment amounts in full when the forbearance plan expires.
Mortgage forbearance can be beneficial when borrowers are facing short-term financial crisis. If financial problems are not resolved, mortgagors face the possibility of losing their home to foreclosure. Therefore, careful consideration must be given before signing on the dotted line.
Another consideration of forbearance agreements is missed mortgage payments are usually reported to credit bureaus as delinquent. Late payments have an adverse effect on borrower's credit scores and can reduce FICO points. This often places borrowers into a lower credit category which can take considerable time to restore and affect their ability to obtain credit in the future. Reduced credit scores can also affect borrowers' ability to enter in other foreclosure prevention strategies such as loan modification or mortgage refinance.
Another consideration of mortgage forbearance is the affect deferred payments have on escrow accounts. Mortgage payments include funds to pay property taxes and mortgage insurance. These funds are transferred to escrow to cover annual expenses.
If real estate taxes and mortgage insurance becomes due during the forbearance agreement, the escrow account may not have adequate funds. Borrowers are responsible for paying these expenses or face the potential of having their forbearance agreement revoked. If taxes and insurance are not paid during mortgage forbearance, lenders can commence with foreclosure proceedings.
With that being said, real estate forbearance contracts can be a good option if borrowers are confident they can repay loan deferment payments at the end of the contract. Mortgagors must be proactive about getting their financial affairs in order during the forbearance contract to ensure they can meet loan obligations when the contract terms expire.
Borrowers must contact their lender's loss mitigation department to obtain a forbearance agreement. Mortgagors facing long-term financial problems caused by unemployment, chronic health issues, death of a spouse, or divorce, should discuss all available foreclosure prevention options.
Most mortgage lenders require borrowers to submit financial records and a letter of hardship. Hardship letters give borrowers the opportunity to explain the circumstances which caused them to fall behind with mortgage payments, along with action taken to rectify their situation.
Mortgagors should contact their lender at the first sign of financial hardship. Mortgage lenders are typically more eager to work with borrowers who are proactive in finding solutions. If banks are unable to provide mortgage-relief options, borrowers may need to hire a real estate lawyer or obtain housing counseling through the Department of Housing and Urban Development. HUD offers no-cost counseling services to help borrowers stop foreclosure and provides a list of nationwide housing counselors via their website at HUD.gov.
