If you’re facing unexpected financial woes, you may be able to secure temporary relief from your mortgage payments with a forbearance agreement. This begs the question: What is a forbearance agreement, and how does it work? Learn everything you need to know about the topic in this helpful guide from the experts at Champions Mortgage, the leading mortgage broker in Houston, Texas.
Understanding Mortgage Forbearance Agreements
Failing to make payments on your home loan often sets you on the path toward foreclosure and bad credit. However, there’s a simple way to avoid foreclosure and face minimal penalties. Lenders sometimes offer loan forgiveness to struggling homeowners who plead their case for a forbearance agreement.
What is a forbearance agreement? For homeowners who have trouble paying their monthly mortgage, seeking forbearance from a lender gives them some relief during periods of financial hardship. Reaching an agreement with your lender lets you postpone making payments temporarily, but it does not eliminate the amount you owe.
You will need to collaborate with your lender to discuss any changes to your financial situation and repayment options. A key part of a forbearance agreement is figuring out which repayment options you’ll use once you regain financial stability.
When Can You Secure a Mortgage Forbearance Agreement?
Homeownership comes with new financial responsibilities, mortgages being one of many. You must pay your home loan with interest and your monthly utility bills. In addition, you’ll need to take care of any unexpected issues, such as replacing home appliances or repairing damage to the house.
Say you need to replace your roof, but the project’s high cost causes you to miss one month’s mortgage payment. Lenders usually don’t extend loan forgiveness in circumstances like this because there is no drastic change in your income, so they assume you’ll continue to make payments in the months to come. If you experience a financial hardship that will impact your payments for the foreseeable future, you may be able to enter a loan forgiveness agreement.
Reach out to your lender when your financial status changes for reasons like:
- Medical debt
- Unemployment
- Divorce
- Natural disasters
- Economic downturns
Repayment Options Following Mortgage Forbearance
Now that you know the answer to “What is a forbearance agreement?” you’re probably wondering how it works in terms of repaying the loan. Each homeowner’s agreement terms will vary based on their financial situation and lender. The only constant condition is that the borrower makes up for the missed payments and interest, depending on the loan’s rate.
You can discuss options with your lender to reach an agreement that satisfies both parties. Once your temporary relief period ends, you might pay all the missed payments back in one lump sum. Another option is to resume monthly payments at a slightly higher amount until the debt is gone.
How To Arrange a Forbearance Agreement
Say you lose your job and anticipate struggling to pay your mortgage for a few months. You can’t expect your lender to accept several missed payments if they aren’t up to date with your change in financial status. Therefore, you must reach out to the bank or lending institution and convey your interest in a forbearance agreement.
The lender will assess your finances before deciding on temporary loan forgiveness. Expect them to ask you for some personal information, including:
- Documentation of your hardship: If a certain diagnosis keeps you from working and puts you in medical debt, the hospital bill will document your struggle.
- Proof of income: Banks want to see a paper trail of your income, including pay stubs, unemployment checks, and more.
- Monthly expenses: Provide a breakdown of your monthly budget and expenses for groceries, utilities, gas, and other necessities.
Alternatives to Mortgage Forbearance
If you ask a lender, “What is a forbearance agreement?” and they explain that you don’t qualify for temporary payment relief, you’ll need to explore some alternatives. Even if you meet a lender’s criteria for loan forgiveness, you might decide that another route suits you best. What are the other ways you can navigate mortgage payments during times of financial turmoil?
You can enter voluntary foreclosure and walk away from your loan obligations. However, this also means you’ll need to give up your residence and find a new place to live. If finding alternative and affordable housing is possible, you might benefit from foreclosing.
Another option is to sell the home, with the lender’s permission, at a price less than the remaining amount of your home loan. Like foreclosure, you’ll need to give up your residence and find somewhere else to live.
An alternative that lets you stay in your house is loan modification. As the name implies, a lender will change the terms of your mortgage, so you end up paying lower premiums every month.
Benefits of Loan Modification
What is a forbearance agreement vs. loan modification? Both help you maintain your home loan without any penalties during economic hardship. With a forbearance agreement, you can delay payments, whereas a loan modification keeps payments ongoing but at a lower rate.
Lenders will work with you to determine a reasonable premium you can manage even during economic uncertainty. They may agree to any of the following changes that impact the cost of your monthly mortgage:
- Lowering your interest rate
- Extending the loan’s term
- Switching the interest rate from a variable amount to a fixed rate
Depending on your preferences, you might consider asking for a modification rather than loan forbearance.
Consult With a Home Lending Expert – Contact Champions Mortgage
After reading this guide, you no longer have to wonder, “What is a forbearance agreement on a mortgage?” For other questions related to mortgages, such as the process of buying a house with multiple owners, reach out to the lending experts at Champions Mortgage. We help homeowners and prospective buyers secure and refinance home loans in the greater Houston area.
Request a consultation with a lending specialist today. Call (281) 727-2500 or email info@championsmortgageteam.com.
