Forbearance

Forbearance is a temporary postponement of mortgage payments. It is a form of repayment relief granted by the lender or creditor in lieu of forcing a property into foreclosure. Loan owners and loan insurers may be willing to negotiate forbearance options, because the losses generated by property foreclosure typically fall on them.

Forbearance provides the borrower time to repay delinquent mortgage sums. This is advantageous to the struggling borrower, and offering forbearance benefits the loan owner, which frequently loses money on a foreclosure after paying the fees associated with the process. On the other hand, loan servicers, who collect payments but do not own the loans, may be less willing to work with borrowers on forbearance relief because they do not bear as much financial risk.

The terms of a forbearance agreement are negotiated between the borrower and lender. The opportunity for such an agreement depends on the likelihood that the borrower will be able to resume monthly mortgage repayments once the temporary forbearance is over. Moreover, the lender may approve a full or only a partial reduction of the borrower's payment depending upon the extent of the borrower's need and the lender's confidence in the borrower's ability to catch up at a later date.

In some cases, the lender grants the borrower a full moratorium on making mortgage payments for the forbearance period. Other times, the borrower is required to make interest payments but not pay down principal. In other cases, the borrower pays only part of the interest with the unpaid portion resulting in negative amortization. Another forbearance option is for the lender to reduce the borrower's interest rate on a temporary basis.

Being awarded forbearance on a mortgage requires contacting the lender, explaining the situation and receiving approval. Borrowers with a history of making payments on time are more likely to be granted this option. The borrower must also demonstrate cause for repayment postponement, such as financial difficulties associated with a major illness or the loss of a job.

For example, a borrower who worked the same job for 10 years and never missed a mortgage payment during that time is a good candidate to receive forbearance following a layoff, particularly if the borrower has in-demand skills and is likely to land a comparable job within weeks or months. Conversely, a lender is less likely to grant forbearance to a laid-off borrower with a spotty employment history or a track record of missing mortgage payments.