What Is Forbearance in Real Estate?
Get a clear understanding of real estate forbearance, a key financial tool for homeowners navigating temporary mortgage challenges.
For homeowners facing unexpected financial hardship, real estate forbearance offers a temporary reprieve from mortgage payment obligations. This arrangement provides a safety net, allowing individuals to navigate difficult periods such as job loss, illness, or natural disasters without immediately risking their homes. It serves as a bridge to help borrowers regain financial stability before resuming their regular mortgage commitments.
Understanding Forbearance
Forbearance in real estate refers to a formal agreement between a mortgage borrower and their loan servicer or lender. This agreement allows for a temporary suspension or reduction of mortgage payments during a period of financial distress. Its purpose is to provide short-term relief, helping homeowners avoid delinquency and potential foreclosure when unforeseen circumstances impact their ability to pay.
Forbearance is not debt forgiveness; missed or reduced payments are still owed and must be repaid later. Lenders and servicers offer forbearance as a tool to support borrowers through temporary setbacks, such as illness, job loss, or natural disasters. This arrangement helps borrowers stabilize their financial situation without the immediate pressure of full mortgage payments.
Requesting Forbearance
Initiating a forbearance request begins with contacting the mortgage servicer directly. Homeowners should locate the contact information on their most recent mortgage statement or the servicer’s official website. Explain the nature of the financial hardship and inquire about available forbearance or hardship assistance options. This initial communication is important, as forbearance is not granted automatically and requires a formal request.
Borrowers should be prepared to provide documentation demonstrating their financial difficulty. This may include a detailed explanation of the hardship, an estimate of current monthly income, and a breakdown of current monthly expenses. Information such as recent pay stubs, bank statements, and tax returns might also be requested to verify the financial situation. Keeping a record of all communications with the servicer is a prudent practice.
The Forbearance Agreement
Once a forbearance request is approved, a formal agreement outlines the specific terms and conditions. This agreement specifies the duration of the forbearance period, which commonly ranges from three to six months, with possibilities for extension up to 12 months depending on the loan type and lender policies. It details whether payments will be fully suspended or reduced. While payments may be paused, interest continues to accrue on the loan balance throughout the forbearance period.
Borrowers remain responsible for the total amount owed, including the principal, interest, and any escrowed amounts for property taxes and insurance. If the mortgage includes an escrow account, the servicer continues to pay property taxes and insurance premiums on the borrower’s behalf. However, this can lead to an escrow shortage at the end of the forbearance, potentially increasing future monthly payments to replenish the account. The agreement also clarifies how late fees and penalties are handled, with many forbearance plans waiving them during the agreed period.
Repaying Forborne Amounts
After the forbearance period concludes, borrowers must address the accumulated missed or reduced payments. Several options are available to repay the forborne amounts, which servicers will discuss with the homeowner. One option is reinstatement, where the borrower pays the entire missed amount in a single lump sum. While a lump sum is an option, servicers of government-backed loans cannot require it and must offer other alternatives.
Another common method is a repayment plan, which spreads the missed payments over a set period, often 6 to 12 months, by adding a portion to the regular monthly mortgage payment. This allows borrowers to catch up gradually. A payment deferral, or partial claim, moves the missed payments to the end of the loan term, or places them into a subordinate lien that becomes due upon the sale, refinance, or maturity of the mortgage. A loan modification can also permanently change the mortgage terms, potentially lowering the interest rate, extending the loan term, or adding missed payments to the principal balance to make monthly payments more affordable.