A homeowner who is having difficulty making monthly mortgage payments can talk to his mortgage holder about entering into a forbearance agreement. If the mortgage holder agrees, the homeowner will gain a few months to get himself back on his feet financially. However, with a forbearance agreement, like any other financial agreement, comes expectations and consequences.
What is Forbearance?
Under a forbearance agreement, the bank has agreed to postpone its right to start foreclosure proceedings on your home. Your mortgage holder will reduce or suspend your monthly payments for a period of time agreed upon by you and your financial institution. Forbearance is an option when a homeowner hits a time of temporary financial difficulty such as on leave from a job with no or reduced pay, with expectation of being back at work full-time in the near future.
What Happens With Forbearance?
Under a forbearance plan, the reduced or deferred payments are worked into a repayment plan. At the end of the agreed upon period, you will be expected to resume payments on your original mortgage plus pay either an additional monthly sum, or a lump sum, to cover the reduced or deferred payments.
To qualify for a forbearance plan, the homeowner must demonstrate that he will be able to pay his original mortgage obligation, plus the additional loan costs at the end of the forbearance period. For example, suppose you and your lender agree to defer $10,000 for six months, representing principal, interest and late fees. If the forbearance agreement has a two-year repayment plan at 5 percent interest, you will need to pay an additional $438.71 per month for 24 months in addition to your regular mortgage payment. It is your responsibility to make sure the terms of the forbearance agreement will be manageable in the foreseeable future.
Reinstatement of Foreclosure
Lenders are taking a risk by agreeing to a forbearance agreement. They are allowing the homeowner to assume additional debt with little or no payment on the debt until a future agreed upon time. If the homeowner defaults during any time, the lending institution is within its rights to immediately start foreclosure proceedings.
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