What is a Mortgage Forbearance Agreement?
A mortgage forbearance agreement is an accord made between a mortgage lender and a borrower who has fallen behind on their payments. The agreement enables borrowers to pause or reduce their mortgage payments for a predetermined period, during which the lender agrees not to foreclose on the property. This mechanism is designed to give borrowers experiencing temporary financial difficulties time to recuperate and become current on their mortgage obligations.
Key Takeaways
- Temporary Relief: Mortgage forbearance agreements offer temporary respite, allowing borrowers to address temporary financial issues and stay in their homes.
- Payment Adjustments: These agreements often involve either the reduction or suspension of mortgage payments for a set duration.
- Accruing Interest: While payments may be temporarily halted, interest typically continues to accrue on the loan balance.
- Extension Possibilities: Under certain conditions, the forbearance period may be extended if financial hardship persists.
How a Mortgage Forbearance Agreement Works
When borrowers face financial difficulties, a forbearance agreement can help. Lenders agree to reduce or suspend mortgage payments temporarily and withhold foreclosure proceedings during this period. At its conclusion, borrowers must resume full payments and cover any missed amounts. Variability in terms exists among different lenders and individual scenarios. Note that during the forbearance period, interest continues to accumulate.
Distinguishing Forbearance from Loan Modification
While forbearance offers short-term relief, a loan modification presents a more permanent restructuring of mortgage terms to create more manageable payments. Loan modifications might include adjustments to the interest rate, converting from a variable to a fixed rate, or extending the loan term.
Loan Modification Eligibility
Borrowers must demonstrate financial hardship, complete a trial period, and submit necessary documentation, which may include financial statements, proof of income, and hardship statements.
Mortgage Forbearance and COVID-19
The COVID-19 pandemic prompted special forbearance measures for federally-backed mortgages, such as those from HUD/FHA, VA, USDA, Fannie Mae, and Freddie Mac. Borrowers affected directly or indirectly by the pandemic are eligible without the need for extensive proof.
Application Deadlines
Deadlines vary by loan type, with some having definitive deadlines while others remain open-ended. Extensions are available based on continuing hardship.
Length of Forbearance
Initial forbearance usually lasts between 3 to 6 months, with potential extensions up to a total of 18 months depending on the specific terms and when the initial forbearance began.
Additional COVID-19 Forbearance Provisions
- Payment Adjustments: Payments can be deferred or reduced, with interest accruing but not capitalized.
- Free from Penalties: There are no additional fees or penalties applied during this period.
Homeowner Assistance Fund
The American Rescue Plan Act of 2021 includes a $10 billion fund dedicated to preventing foreclosures, delinquencies, and utility loss, thereby assisting homeowners facing significant financial stress.
Post-Forbearance Repayment Options
Upon concluding the forbearance, borrowers have several repayment options, including:
- Repayment Plans: Integrating a portion of missed payments into regular payments.
- Deferral/Partial Claims: Transferring deferred payments to the end of the mortgage or placing them in a separate lien.
- Modification: Adjusting payment amounts and altering mortgage terms.
Borrowers cannot be forced into lump-sum repayment, providing them with more sustainable recovery options.
Related Terms: loan modification, adjustable-rate mortgage, fixed interest rate, COVID-19 financial relief, housing assistance.
References
- U.S. Congress. “H.R. 748 - CARES Act”.
- Consumer Financial Protection Bureau. “Learn About Forbearance”.
- Federal Trade Commission. “Mortgage Discrimination.”
- Consumer Financial Protection Bureau. “Mortgage Forbearance During COVID-19: What to Know and What to Do.”
- The White House. “Fact Sheet: Biden Administration Announces Additional Actions to Prevent Foreclosures”.
- U.S. Department of the Treasury. “Homeowner Assistance Fund.”
