Forbearance

Forbearance is an arrangement in which the lender temporarily suspends or reduces mortgage or loan repayments by the borrower. This mutual agreement aims to give financially distressed debtors a momentary reprieve from paying off their obligations.

Borrowers often find it challenging to repay their debts in time for many reasons, such as unemployment, medical emergencies, natural disaster, etc. So they negotiate the terms of the contract with their creditors or lenders. It provides them ample time to secure finances to prevent default or property foreclosure. However, after the agreement expires, the debtor must make the outstanding payments.

• Forbearance refers to an agreement wherein the lender either reduces or pauses mortgage or loan repayments for a set period. It does not signify non-payment in any way.
• Even though the provision has no effect on credit scores and helps avoid default, foreclosure, or other penalties, it can result in higher monthly payments over time.
• It allows borrowers facing issues in repaying loans on time due to unemployment, medical emergencies, natural disaster, etc., to get time to regain financial stability.
• In addition to mortgages, forbearance on student loans and credit card loans are available. The debtor, however, must make the remaining payments once the contract expires.

Forbearance enables the borrower, having trouble paying back their mortgage or student loan, to request their lender to reduce or postpone it for some time. The borrower may experience a temporary financial crisis. As a result, they may be unable to make timely payments on loans obtained, making them defaulters. It will eventually impact their credit score, making it more difficult for them to get loans in the future.

Requesting forbearance from the lender may be the best option in this situation. However, they must present the lender with valid grounds for their financial difficulties to complete the arrangement. In other words, forbearance on a loan allows borrowers to regain financial stability before resuming repayment.

It is worth noting that this provision only delays the repayment period and does not imply non-payment in any manner. And the payment resumes after the agreed-upon time. It, thus, helps the debtor avoid foreclosure or default the loan.

A forbearance agreement outlines a few terms, like interest payment, repayment period, etc. It is signed between the lender and the borrower once they agree to these terms. Such an agreement can typically postpone mortgage or loan repayment for 12-18 months or up to three years in extreme situations. After that, the borrower has the option of paying off the loan in whole at the end of the contract or over a set length of time, resulting in higher monthly payments.

For instance, if the agreement allows the debtor to miss a maximum of 15 installments, the repayment period will extend by an additional 15 months after the contract is over. Besides paying increased interest rates accrued during the pause, the debtor may need to pay late fees in some cases. That is why the borrower must negotiate repayment terms with their lender before signing the agreement.

As per the forbearance definition, no matter how the terms are adjusted, there will be no relaxation in the remaining repayment amount. It pauses the repayment schedule, which helps the borrower not default on any installment or face foreclosure. It does not have to do anything with reduced total repayment amount or non-payment of it.

Mortgage forbearance occurs when the lender reduces or suspends monthly mortgage payments, impacting interest payments. It works well where the borrower may be unable to make payments owing to a temporary financial difficulty. During the contract period, borrowers will not be liable to pay late charges. Although contract terms vary from lender to lender, it provides immediate assistance to borrowers and gives them time to regain financial stability.

Mortgage lenders provide various repayment options under the postponement agreement, such as:

• Individuals can repay the amount altogether at once.
• Borrowers can pay the amount over an extended period.
• Individuals can defer payment to the end of the loan term.
• Debtors may opt for a loan modification if there is a provision.

CARES Act And Forbearance

Many governments allowed postponement on mortgages following the adverse effects of the COVID-19 pandemic, such as unemployment, reduced income, illness, etc. In 2020, the United States government introduced the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help people impacted by the COVID-19.

Under this Act, homeowners with federally-sponsored mortgages will be eligible for the postponement of repayments. It will postpone the repayments for a maximum of 180 days, followed by another 180-day extension.

It is up to the lender what options for repayment they offer and what is not on the list. To be eligible for mortgage forbearance as part of the COVID-19 relief, borrowers must fall into either of the following categories:

• Experiencing financial crisis directly or indirectly due to the pandemic, or
• Having a mortgage federally backed or sponsored by HUD/FHA, USDA, VA, Fannie Mae, and Freddie Mac.

For postponement requests sought on or before June 30, 2020, HUD/FHA, the USDA, or the VA will give a 12-month temporary respite. Meanwhile, Fannie Mae and Freddie Mac will extend forbearances for up to 18 months for requests made on or before February 28, 2021.

Besides mortgages, forbearance could apply on student loans and credit card loans for a certain period in the event of financial hardships.

For students, it is a common means of postponing the repayment of education loans when they struggle to find a job. Once they get a job and have a sufficient income, they can start paying off their debts. Students should take into account their loan interest payments, in particular.

The U.S. Department of Education implemented a program in March 2020 in response to the increased unemployment rate caused by COVID-19. All defaulted Federal Family Education Loan (FFEL) Program loans would be eligible for the postponement of up to 60 days under this provision from the Federal Student Aid office. On February 1, 2022, loan payments will restart.

Even though loan repayment postponement is a part of the CARES Act, this law only applies to federal student loans, not private student loans.

In the case of credit card loans, lenders may defer the due date of monthly loan payments or waive late fees. The type of relaxation offered to borrowers varies with the credit card service provider.

Although reduction or postponement of loan repayment is beneficial for someone going through a temporary financial difficulty, it does come with some drawbacks. Let us look at this provision from both perspectives:

Pros

• Reduces loan or mortgage amount or puts a pause to repayment for the time being
• Protects borrowers from defaulting on loans
• It helps debtors avoid property foreclosure
• It gives sufficient time to individuals to regain their financial stand
• No defaults will mean no effect on the individual credit score

Cons

• No concession on the loan amount to be repaid
• It only puts a pause on loan repayment
• Defaulting on loans after repayment postponement impacts the credit score adversely
• The interest rate for the extended repayment period will continue to accrue
• The loan amount because of the additional interest amount makes people pay more

This has been a guide to Forbearance and its meaning. Here we discuss how forbearance works, terms, mortgage, the loan and also its pros and cons. You can learn more from the following articles – 

• Short Sale vs Foreclosure
• Freddie Mac vs Fannie Mae
• Promissory Note