Mortgage forbearance is a foreclosure prevention option available to borrowers requiring short term financial assistance. Mortgage lenders sometimes enter into forbearance agreements when borrowers experience unexpected emergencies, such as loss of employment or health problems, which prevent them from making mortgage payments in full.
In order to obtain a mortgage forbearance, debtors must submit financial records to provide evidence they are capable of paying future home loan payments. Once banks enter into forbearance contracts they agree to suspend foreclosure action unless homeowners default on the deferment plan agreement.
Obtaining approval for mortgage payment forbearance requires borrowers to work with their bank’s loss mitigation department. While banks must comply with established protocol, some are more stringent than others. Most require debtors to undergo a financial audit and submission of a forbearance hardship letter which outlines the events that caused borrowers to fall behind with mortgage payments.
A bank loss mitigator is assigned to work with homeowners during the forbearance process. Loss mitigators do not make the final decision as to whether mortgage payment forbearance will be approved or not. Instead they act as a mediator between mortgage lenders and homeowners and are responsible for obtaining financial records, reviewing borrowers’ mortgage payment records, and submitting recommendations to bank management.
It is important to note that mortgage forbearance plans are not the same as a loan modification or mortgage refinance. While each plan can help borrowers stop foreclosure, they are radically different. Loan modifications and refinanced mortgages permanently alter terms and payment amounts, while forbearance plans temporarily alter payment terms.
Mortgage loan forbearance agreements usually last between three and six months. Some banks require debtors to provide a down payment and extend the balance of mortgage arrears over the course of the forbearance agreement. Other banks enter into forbearance without requiring a down payment. Throughout the forbearance period homeowners are required to pay their normal monthly mortgage payment along with additional funds to cure mortgage arrears.
Loss mitigators are required to explain necessary payment requirements and terms of the forbearance to borrowers. Homeowners should be informed of the mortgage arrears amount, monthly payment amount, payment dates, accrued interest, late fees and penalties, and the duration of the forbearance plan. Mortgage forbearance agreements are legally binding contracts which must be signed by the mortgage service provider and borrowers.
If homeowners default on the mortgage forbearance contract, lenders can initiate foreclosure action. Borrowers should carefully weigh the pros and cons of entering into a forbearance plan. Defaulting on mortgage payments during the forbearance period will most likely result in foreclosure.
Depending on the circumstances it might be more advantageous to apply for mortgage refinance. Refinancing involves applying for a new home loan to pay off the original mortgage. Borrowers should review their current mortgage documents to determine if prepayment penalties will be assessed when taking out a new loan.
Most lenders include a prepayment clause and assess closing costs to refinance mortgage loans. Settlement fees are the responsibility of the borrower and must be paid up front. Rarely do lenders roll closing costs into the refinanced loan.
Refinancing reduces monthly mortgage payments by extending the loan terms. For example, if a homeowner has 20 years of payments remaining on his current mortgage note and refinances into a 30 year mortgage, he will add an additional 10 years of mortgage payments.
Most people consider their home to be their most valuable asset. Homeowners that are struggling to meet mortgage obligations should immediately contact their lender to discuss available options.