Mortgage Forbearance Agreement: Definition, Purpose, How It Works

What Is a Mortgage Forbearance Agreement?

A mortgage forbearance agreement is an agreement made between a mortgage lender and a delinquent borrower. In this agreement, the lender agrees not to foreclose on a mortgage, and the borrower agrees to a mortgage plan that will bring the borrower current on their payments over a certain time period.

The coronavirus outbreak triggered forbearance help beginning March 18, 2020. Legislation and policies in the wake of the 2020 economic crisis have sought to offer relief to struggling homeowners.

Key Takeaways

• A mortgage forbearance agreement is a plan made between a lender and a borrower who is struggling to make mortgage payments that attempts to allow the borrower to fulfill the mortgage obligation and avoid foreclosure.
• The agreement generally reduces or suspends mortgage payments for a set time period during which the lender agrees not to foreclose on the property.
• It is intended for borrowers with temporary financial problems and is not considered a long-term solution.
• In some cases, a lender may extend the forbearance agreement beyond its initial end date.

How a Mortgage Forbearance Agreement Works

A mortgage forbearance agreement is made when a borrower has difficulty meeting their payments. With the agreement, the lender agrees to reduce or suspend mortgage payments for a certain period of time and not initiate a foreclosure during this period.

The borrower must resume full payment at the end of the period, plus pay an additional amount to catch up on missed payments, including principal, interest, taxes, and insurance. The terms of the agreement vary among lenders and situations. With a regular forbearance agreement, interest continues to accrue during the suspension of payments.

Mortgage lending discrimination is illegal. If you think you’ve been discriminated against, there are steps you can take, such as filing a report to the Consumer Financial Protection Bureau or the U.S. Department of Housing and Urban Development (HUD).

A mortgage forbearance agreement is not a long-term solution for delinquent borrowers. It is designed for borrowers with temporary financial problems caused by unforeseen issues, such as temporary unemployment or health problems. Borrowers with more fundamental financial problems should seek other remedies, such as a loan modification.

In some cases, a borrower can avoid foreclosure until their financial situation improves. The lender may also be able to extend the forbearance period if the borrower’s hardship persists beyond the original end date.

A loan modification is a permanent solution to unaffordable monthly mortgage payments through the renegotiation of mortgage terms, rather than the temporary suspension or reduction of payments.

Mortgage Forbearance Agreement vs. Loan Modification

While a mortgage forbearance agreement provides short-term relief, a loan modification agreement is a permanent solution to unaffordable payments. With a loan modification, the lender can work with the borrower to reduce the interest rate, convert to a fixed interest rate, or extend the loan term to lower the monthly payments.

To be eligible for a loan modification, borrowers must show financial hardship, complete a trial period to demonstrate their ability to afford the new payment, and provide required documentation to the lender.

Legislation related to the 2020 economic crisis provides special mortgage forbearance help to homeowners with federally-backed home loans.

Mortgage Forbearance Agreements and COVID-19

Legislation related to the 2020 economic crisis offers special mortgage forbearance help for homeowners with federally-backed home loans, including loans backed by Fannie Mae, Freddie Mac, FHA/HUD, VA, and USDA. Eligibility for COVID-19 mortgage forbearance is based on experiencing financial hardship directly or indirectly due to the pandemic.

Although private mortgages not federally backed are not covered by the legislation, private loan servicers may offer similar forbearance options. Loan servicers are generally required to discuss payment options with borrowers, even if the loan is not federally backed.

Eligibility

You are eligible for COVID-19 mortgage forbearance if you have an HUD/FHA, VA, USDA, Fannie Mae, or Freddie Mac mortgage and experience financial hardship due to the pandemic. No proof of hardship is required.

Deadline to Apply

Since private loans are not covered by COVID legislation, private mortgage COVID-19 loan forbearance is whatever you can negotiate with your lender. Therefore, the application deadline, if one exists, is up to the mortgage servicer.

Once you have applied and been granted forbearance, you can extend for up to one year.

Length of Forbearance

COVID-19 forbearance has a specific time length. Most agreements last 3 to 6 months with renewal up to 12 months. In certain cases, total forbearance can be as long as 18 months.

Other Provisions of COVID-19 Mortgage Forbearance

COVID-19 mortgage forbearance agreements include non-negotiable provisions that may not be found in regular mortgage forbearance agreements.

• Payments can be deferred or reduced.
• Interest accrues but is not capitalized.
• No additional fees or penalties will be levied.

Homeowner Assistance Fund

The American Rescue Plan Act of 2021 included the Homeowner Assistance Fund to provide help to homeowners at risk of foreclosure or eviction. Funds will also be used to assist homeowners experiencing financial hardship related to mortgages and housing.

When Forbearance Ends

At the end of COVID-19 mortgage forbearance, repayment options vary depending on the agency. Repayment can involve adding a portion of the owed amount to the regular payment, deferral/partial claim, loan modification, or an optional lump-sum payment. Borrowers cannot be required to repay the deferred amount in a lump sum.