What is Forbearance?
Mortgage forbearance is a payment relief option offered in many mortgage modification programs that involves the temporary delay or suspension of monthly mortgage payments for an agreed upon amount of time. In some cases, it can be a temporary reduction of the loan’s principal amount.
Mortgage forbearance is particularly useful when homeowners find themselves facing short term financial hardships. The suspension of payments gives homeowners time to rebuild their finances, and get back on track with their monthly mortgage payments. Forbearance is a quick fix to avoid possible foreclosure for those at risk.
How does forbearance work?
The act of forbearance is a pretty straightforward approach to a mortgage modification. Through forbearance, borrowers are given a set amount of time known as a forbearance period. During this period, borrowers have a few options as to how payments are to be handled.
In many cases, lenders opt to suspend monthly mortgage payments during the aforementioned forbearance period. This means that borrowers are not expected to make their monthly mortgage payments during this time. The idea is to allow borrowers to save up some money and/or get their finances back on track to begin making their expected monthly mortgage payments.
A little less drastic, payment reductions are another option for forbearance. How the payments are reduced is another thing entirely. Lenders have a few methods for reducing a borrower’s monthly mortgage payments including (but not limited to):
Lowering the interest rate: This is a temporary interest rate reduction for the forbearance period aimed at giving borrowers a chance to save money while still making payments on their mortgage
Reduced Positively amortized payments: Paying only slightly more than the due interest on the loan helps borrowers stay on track with repayment of interest, while reducing the principal amount for the forbearance period.
Negatively amortized payments: A reduction of interest and principal, that greatly reduces the payment amount, at the cost of negatively amortizing the home loan.
Interest only: The payments are reduced to only the due interest each month. This can be worth a ton in savings, but is more costly in the long run, since none of the principal is touched during the forbearance period.
Depending on what the borrower and the lender agree on, the terms of the forbearance are set in motion during the agreed upon forbearance period. At the end of the period, borrowers are expected to return to the original terms of the loan agreement, and continue paying the full amount expected of their monthly mortgage payment.
It is important to note that the terms of the forbearance are decided on an individual client basis. Lenders will decide what actions are available based on each borrower’s specific situation, and perhaps offer a couple choices. There is no one size fits all forbearance strategy.
How Forbearance is Settled
Forbearance can truly help homeowners in a tight spot to prevent a foreclosure. However, it is not a complete “get out of jail free” card. The money that you aren’t expected to pay during the forbearance period is still owed to the lender. As a matter of fact, repayment is one of the major things discussed and solidified during a mortgage modification meeting.
A good portion of the time, the missed or suspended payments are still capitalized by being integrated back in to the principal loan amount. This sometimes means extending the loan term in order to pay off the remaining loan balance.
If this isn’t the case, then often times a large payment known sometimes as a balloon payment, is due at a set date. Typically balloon payments are agreed upon when the forbearance action was to suspend payments during the forbearance period.
Ending up having to make a balloon payment can be the extremely problematic for a lot of borrowers. Typically the amount that is to be paid can be multiple times larger than the typical monthly payment amount. It is made more so problematic because the borrower is recovering from financial hardship, and a payment of that caliber could put a borrower right back in that situation.
To make matters worse, a lot of the time, these balloon payments are non negotiable and must be paid in full at the agreed upon date. Borrowers who have had mortgage forbearance and are expected to make a balloon a payment should save towards that goal at all costs in order to not get stuck in a worse situation.
How to Qualify for Mortgage Forbearance
Forbearance isn’t meant for everyone. Homeowners looking to take a break from payments or save money cannot simply apply for it. Same goes for any mortgage modification. Forbearance, and any other modification parameter meant to reduce a borrower’s monthly mortgage payments are reserved for homeowners who have recently come in to financial hardships, and are at risk for foreclosure. That being said, forbearance in particular is often the go-to solution for borrowers who lose their employment and receive unemployment.
Beyond a quick solution for unemployment, every lender has a different take on how to handle mortgage modification, and forbearance by extension. Typically, mortgage modifications are available to those who meet the following criteria:
Must have suffered a recent financial hardship (and be able to prove it) that makes it difficult to make mortgage payments.
Acceptable hardships include (but are not limited to) divorce, Death of a family member or spouse, Loss of employment, or serious illness.
Must be at least 60 days delinquent on a mortgage payment
If not, eligibility is extended to borrowers whose mortgages have been deemed to be in imminent default by the lender
Mortgage must be at least one year old.
If you are in need of payment relief after a recent financial hardship or loss of employment, then mortgage forbearance may be the solution you’ve been looking for. No homeowner should have to go through a foreclosure. Call your lender as soon as you feel as though you won’t be able to afford your monthly mortgage payments, and ask if forbearance is a viable option for your situation. Just be sure to remember that it is only a temporary reprieve, and that you may have a balloon payment to contend with sometime down the line.