A Fresh Start with a Forbearance Agreement
Whether you’re about to fall behind on your mortgage or have already done so, a forbearance agreement avoids foreclosure while you catch up.
A forbearance agreement gives you short-term relief to deal with a temporary period of financial hardship. Your mortgage lender agrees, either in advance or after the fact, to accept a period of reduced or suspended monthly payments in return for your agreement to return to full monthly payments and catch up on the missed payments within a certain length of time. The lender agrees to not foreclose—to “forbear” from foreclosing—as long as you make the agreed regular and catch-up payments. You are given this grace period to bring the mortgage current and then return to making just the regular monthly payments.
Compared to Mortgage Modification
Forbearance agreements are usually much easier to qualify for and quicker to negotiate with the lender. After all you are not changing most of the terms of the mortgage—almost always the regular monthly payment, the interest rate, and the length of the overall mortgage don’t change. You’re just forgiven for a period of time of being in default on the payments, and are then required to catch up relatively quickly. A forbearance agreement does not make your mortgage more affordable long-term, but rather gets you back in good graces with the same mortgage you signed up for originally.
In contrast, a mortgage modification changes the terms of the mortgage to make it more affordable long-term, by reducing the monthly payment. But besides being relatively difficult to qualify for and process, mortgage modifications usually don’t reduce the principal amount you owe but rather make it somewhat easier to pay, with a reduced interest rate or a longer term (for example, 40 years instead of 30). See our last blog post for more about mortgage modifications.
The Relatively Rare Solution
So forbearance agreements are only appropriate for that relatively rare situations in which you only miss a few months of mortgage payments and then get to a point in which you can not only afford the regular payments again but also pay a significant amount extra each month to catch up on the missed payments within a relatively short period of time.
The amount of time to catch up varies with each mortgage lender and the circumstances of each case. Periods of 6 to 10 months are common, seldom more than a year.
Take the example of a mortgage with a monthly payment of $1,500. If the homeowner missed 5 payments because of a job loss, he or she would be $7,500 behind on the mortgage. After the lender starts a foreclosure, the homeowner finds steady employment and negotiates a forbearance agreement to catch up on that $7,500 over the next 10 months. He or she would have to make the regular $1,500 monthly payment plus $750 extra every month for 10 months. During those 10 months the foreclosure would be put on hold. At the end of that time the homeowner would be current on the mortgage and the foreclosure would be canceled.
Forbearance Agreements and Bankruptcy
For most people, coming up with the extra monthly amount—the $750 in the above example—is impossible because of other debts. So forbearance agreements are often used together with Chapter 7 “straight bankruptcy.” Paying the catch-up payment can be much more feasible if you don’t have to pay most or all of your other debts at the same time.
Forbearance agreements do not usually work with Chapter 13 “adjustment of debts” payment plans. Instead Chapter 13 is often used instead of forbearance agreements if you simply don’t have the cash flow to make the catch-up payments that your lender would require of you. Chapter 13 can usually allow you to catch up over a much longer period of time—3 to 5 years instead of a year or less with a forbearance agreement. Stretching out the catch-up payments under a Chapter 13 plan lowers that monthly amount significantly. Chapter 13 may also allow you to stop payments on a second (or third) mortgage, give you longer to catch up on any back property taxes or homeowner association dues, and deal better with income tax liens or other obligations tied to the home. We’ll address the Chapter 13 option more thoroughly in our next blog post.