Forbearance
Forbearance is a temporary relief measure granted by a mortgage lender that allows a borrower to either pause or reduce their monthly mortgage payments for a specific period. It is not loan forgiveness, but a formal agreement designed to provide a short-term financial safety net for homeowners facing temporary and verifiable hardship, such as job loss, illness, or a natural disaster.
Purpose and Function
The primary purpose of forbearance is to help a homeowner navigate a period of financial distress without defaulting on their loan and entering foreclosure. By providing this temporary reprieve, lenders give borrowers critical time to stabilize their financial situation and get back on track with their payments. It is a collaborative solution intended to prevent a temporary setback from becoming a permanent housing crisis.
To obtain forbearance, a homeowner must proactively contact their lender, explain their hardship, and formally request assistance. The lender will then review the situation and, if approved, outline the terms of the agreement, including the duration of the forbearance period and the structure of the reduced or paused payments.
How It Works and Repayment
During the forbearance period, which typically lasts for a few months, but can be extended depending on the circumstances, the borrower makes the agreed-upon lower payments or no payments at all. However, it is crucial to understand that the missed payments do not disappear. The borrower is still responsible for repaying the paused amounts.
At the end of the forbearance period, the borrower must work with the lender to establish a repayment plan for the deferred amount. Common options include:
- Lump-Sum Payment: Paying the entire missed amount at once (this is often not feasible for those who have just experienced a hardship).
- Repayment Plan: Spreading the missed amount over several months and adding it to the regular monthly mortgage payment.
- Loan Modification: Permanently altering the original terms of the loan to incorporate the missed payments, which could involve extending the loan term.
- Payment Deferral: Moving the missed payments to the end of the loan term, to be paid when the home is sold, refinanced, or the mortgage matures.
Implications for Homeowners
Entering into a forbearance agreement has significant implications. While it is a powerful tool to prevent foreclosure, homeowners must be aware that it can impact their credit, although it is generally less damaging than a series of missed payments or a foreclosure. Communication with the lender is essential throughout the process to ensure a clear understanding of the terms and to plan effectively for the end of the forbearance period. Successfully navigating a forbearance agreement allows a homeowner to maintain possession of their property and regain financial stability.
