A forbearance agreement is sometimes offered to borrowers struggling to meet their mortgage loan obligation and to those who enter into pre-foreclosure foreclosure. When lenders enter into a real estate forbearance agreement, they agree not to proceed with the foreclosure action as long as the mortgages comply with the terms.
The forbearance agreement allows borrowers to obtain special financing terms for a specified period of time. The average duration of mortgage forbearance contracts is usually 2-3 months. However, banks can extend the terms for up to 12 months when there are extenuating circumstances.
While a mortgage forbearance agreement can help borrowers get their finances to meet future loan obligations, this type of agreement presents risks. Through the forbearance agreement, banks temporarily reduce or suspend mortgage payments. Once the agreement expires, borrowers must be financially able to repay the amount of the late or reduced payments.
For example, if a borrower’s monthly mortgage loan installment is $ 1,200 and his lender reduces the payment to $ 600 over 4 months, he should be able to repay $ 2,400 at the end of the forbearance contract. If you cannot pay the full amount, the lender can proceed with the foreclosure action.
Additionally, home loan payments are reported to the three major Equifax credit bureaus, Experian and TransUnion. Deferred payments are often reported as delinquent, which can have an adverse effect on borrowers’ credit ratings.
Those already in low credit can quickly move into the high risk category, which can limit their ability to obtain credit in the future. Bad credit can prevent borrowers from qualifying for other types of foreclosure prevention strategies, such as loan modifications and mortgage refinancing.
Another concern of real estate forbearance is the effect that deferred payments have on the escrow. Home mortgage loans incorporate the funds needed for homeowners insurance and property taxes. A portion of each payment is escrowed to cover annual expenses.
If insurance premiums or property taxes are due during the forbearance plan, the escrow account may fall short. Mortgages are responsible for paying these expenses out of pocket. If property insurance and taxes are not paid, banks can void the forbearance agreement and initiate foreclosure proceedings.
That said, mortgage forbearance can be a good option for those facing temporary financial setbacks. Borrowers must be extremely proactive in putting financial affairs in order during the contract period to ensure that they can pay deferred payments after the plan expires.
Borrowers facing chronic financial problems due to long-term unemployment, health problems, divorce, or the death of a spouse should contact their lender’s loss mitigation department to discuss foreclosure prevention strategies.
Mortgages must obtain authorization from their lender to enter into a mortgage forbearance. Most banks require borrowers to provide financial documents and a letter of hardship.
Hardship letters give borrowers the opportunity to provide details of the events that caused their financial crisis. Lenders generally require mortgages to provide a timeline and summary of difficulties, along with any actions taken to improve finances.
Borrowers should contact their mortgage provider at the first sign of financial difficulties. Banks are often more willing to work with mortgages who are proactive in finding solutions. If lenders are unwilling to assist, borrowers may need to retain the services of a real estate attorney.