Pros and Cons of Using a Forbearance Agreement to Avoid Foreclosure

A forbearance agreement is sometimes offered to borrowers struggling to meet their mortgage loan obligation and those entering pre-foreclosure. When lenders enter into a real estate forbearance agreement, they agree not to proceed with the foreclosure action as long as the mortgagors 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 or 3 months. However, banks can extend terms for up to 12 months when there are extenuating circumstances.

While a mortgage forbearance agreement can help borrowers secure their finances to meet future loan obligations, there are risks with this type of arrangement. Using 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 payment is $1,200 and their lender reduces the payment to $600 over 4 months, they should be able to pay $2,400 at the end of the forbearance agreement. If you cannot pay the full amount, the lender may proceed with a foreclosure action.

Additionally, mortgage loan payments are reported to the three major credit bureaus of Equifax, Experian, and TransUnion. Deferred payments are often reported as delinquent, which can have an adverse effect on borrowers’ credit scores.

Those who are already in a low credit bracket can quickly move into the high-risk category, which may 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 real estate forbearance concern is the effect deferred payments have on escrow. Home mortgage loans incorporate the necessary funds for property insurance and property taxes. A portion of each installment is placed in escrow to cover annual expenses.

If insurance premiums or property taxes are due during the forbearance plan, the escrow account may run short. Mortgage borrowers are responsible for paying these expenses out of pocket. If the property insurance and taxes are not paid, the banks can void the forbearance agreement and start foreclosure proceedings.

That said, mortgage forbearance can be a good option for those facing temporary financial setbacks. Borrowers must be extremely proactive in getting their financial affairs in order during the contract period to ensure that they can afford deferred payments once the plan expires.

Borrowers facing chronic financial problems due to long-term unemployment, health problems, divorce, or death of a spouse should contact their lender’s loss mitigation department to discuss foreclosure prevention strategies.

Mortgage borrowers must obtain authorization from their lender to enter into forbearance. Most banks require borrowers to submit financial documents and a letter of difficulty.

Hardship letters give borrowers the opportunity to provide details of the events that caused their financial crisis. Lenders generally require mortgagors to provide a chronological schedule and summary of hardships, along with any actions taken to improve finances.

Borrowers should contact their mortgage provider at the first sign of financial difficulty. Banks are often more willing to work with mortgage borrowers who are proactive in finding solutions. If lenders are unwilling to provide assistance, borrowers may need to retain the services of a real estate attorney.