No homeowner wants to be faced with a foreclosure; however, in some cases, economic circumstances prove to be too much of a hardship to retain the property. Homeowners and lenders alike typically try to avoid foreclosure at all costs. One strategy that lenders will sometimes offer is a forbearance plan, giving the homeowner time to catch up and forgo monthly payments temporarily.
Today, let’s break down forbearance vs. foreclosure in detail and explore what they mean, how they work, and which you should pursue.
A mortgage forbearance is a loss mitigation strategy used by lenders to help borrowers who have experienced a hardship try and prevent a foreclosure and keep a homeowner in their home.
In a nutshell, a forbearance is a mortgage agreement between a lender and a delinquent borrower. The lender agrees to give the borrower a certain grace period on account of financial hardships. In exchange, the borrower agrees to save money and to resume regular payments at a specified date. In theory, this will allow the borrower to stabilize their finances and become current on their mortgage payments with time.
Lenders are oftentimes willing to accept a forbearance agreement with a borrower since it’s in their best interest to keep a homeowner in the house making payments.
However, forbearance agreements are not guaranteed. Furthermore, at the end of the forbearance timeframe, any deferred payments are due, either in a lump sum or through increased mortgage payments over several months. For this reason, if a homeowner has not been able to improve their situation a forbearance may not completely help them get caught or avoid a foreclosure.
The forbearance process begins when a homeowner speaks to their lender about possible adjustments to their payment due to hardship.
You should always contact your lender right away and be honest about your financial situation when you are concerned about missing monthly payments. Lenders are almost always interested in pursuing forbearance or other alternatives to foreclosures since a foreclosure can cost the lender more money in the long run.
If you tell your lender that you are undergoing financial hardship and need forbearance, they may be very amenable to that request. However, they may also have restrictions or requirements for your forbearance to be approved. It is important to read and pay attention to all information surrounding forbearance since the lender may have specific guidelines and terms that will impact you when you exit the agreement and your loan is reinstated.
If your lender is amenable, request a forbearance agreement to be drafted and sent to your email address or mailbox ASAP. Your mortgage servicer will quickly draft a forbearance agreement for you to review.
They will draft your agreement based on how many months you believe you need your mortgage payments to be deferred. Ultimately, the terms of the forbearance are dependent on what your lender decides, not what you say that you need.
Because of this, be as honest and forthright with your lender as possible. If you make it seem as though you’ll be able to pay them back in two months, don’t be surprised if your forbearance is only for a two-month timeframe.
As your mortgage lender drafts your forbearance agreement, you need to collect all the financial records they request to prove your hardship. This can include missed utility bills or other payments for major things, or it can include a written notice of your termination at work.
Medical bills also serve as important financial records to prove financial hardship. The majority of lenders will not simply take your word as proof that you need a deferment for your mortgage payments. You’ll have to prove it if you want your forbearance agreement to be drafted.
Once you have these records on hand, it is important to send them to your lender immediately. The urgency is due to the possibility of missing monthly payments and becoming delinquent on your mortgage.
If your mortgage lender accepts your proof of financial hardship, they will send you a forbearance letter with the terms of the agreement.
This will include:
For example, your mortgage lender may require you to make a lump sum of any deferred payments as soon as the forbearance ends. Or they may require you to make higher monthly mortgage payments for several months after forbearance to make up for the deferred payments.
Sign the document when you receive it and send it back to your lender. The agreement will likely state when the forbearance period officially starts.
It is important to abide by the terms of the agreement so that you don't have to worry about the potential of losing your home. You should save money according to the terms in your forbearance agreement so that you have what you need to pay off your lender when the forbearance period ends.
Homeowners should never take forbearance as an easy way to skip mortgage payments for several months. Sooner or later, the bill will come due.
Each agreement is different due to risk levels for the lender. Borrowers with a good credit history and consistency with their monthly payments, a good credit score, and proof of financial hardship will be more likely to receive approval for a forbearance request when they are facing a hardship. Borrowers who are frequently delinquent or who cannot prove financial hardship(s) will likely have more trouble with the approval.
Some common examples of qualifying financial hardships include:
Regardless, forbearance is not meant to allow borrowers to put off paying their mortgage payments indefinitely. Instead, forbearance is meant to help mortgage borrowers get back on their financial feet by deferring payments until a later date.
A foreclosure is a legal process in which a lender or mortgage owner takes possession of a property from a delinquent borrower. For example, if a homeowner fails to make mortgage payments after the end of the forbearance period or if they breach any other aspect of a mortgage contract, the mortgage lender then takes possession of the property and evicts the homeowner.
During a foreclosure, the homeowners lose the right to live in the property and see a substantial drop in their credit scores. An unfavorable credit report with a foreclosure mark will make it near to impossible to get another loan since most borrowers have to wait 7 years after a foreclosure to qualify. Further, due to the decrease in credit score, it can be difficult to qualify for a rental.
Foreclosures are typically the last resort for lenders. When a home enters foreclosure, it most often is put up for sale in a public auction. The lender tries to get back as much money as they can from the deal. This takes time and money in and of itself.
Because of this, most lenders want homeowners to be able to make regular mortgage payments. Even if the mortgage agreement has to be changed to accommodate lower levels of income, the lender makes more money in the long term if the homeowner stays housed.
The process of foreclosure follows very strict rules, which may vary slightly from state to state. Furthermore, there are both judicial and non-judicial foreclosures. Judicial foreclosures require the approval of a court before the foreclosure process can proceed. Nonjudicial foreclosures do not require this approval.
A foreclosure is a complicated legal process that involves several moving parts and procedures. While the exact process will depend on your state, all foreclosures follow the same basic steps below.
All lenders, regardless of state – and regardless of whether the state requires judicial or nonjudicial foreclosures – must give the homeowner notice of delinquent payments or other breaches of the mortgage contract.
For example, if a lender is considering foreclosure because a homeowner has missed three months’ worth of payments, they must tell the homeowner this in case they are unaware. Advance notice is important because it gives the homeowner a chance to rectify the situation and avoid foreclosure entirely. It also allows for miscommunications to be cleared up (such as in the case when mortgage payments are stolen rather than missed entirely).
A lender will also provide a homeowner with a certain deadline before which the homeowner must no longer be delinquent on their mortgage payments, or the foreclosure process will proceed.
At this point, homeowners can contact their lenders and ask about various options, including:
If the homeowner remains delinquent on their monthly payments, the lender can then file for foreclosure. If they live in a state with judicial foreclosure, the lender must request court authority to proceed with foreclosure before they can take possession of the property.
Once the lender files for foreclosure, they begin drafting paperwork and preparing for forcible eviction, if necessary.
The homeowner is required to be informed of the upcoming foreclosure deadline. At this point, it may no longer be possible to stop foreclosure, even if the homeowner comes into possession of extra cash and can pay off any debts they may have incurred.
In some states, the homeowner may exercise their right of redemption to pay off any delinquent debts and recover ownership of the property.
If the homeowner does not exercise their right of redemption or pay off any mortgage debts, they will be required to leave the property by a specific date. If they fail to do so, the lender has the right to request the assistance of the sheriff and force an eviction.
In most states, once the homeowner is out of the home, the lender puts the property up for public auction. A public auction gives real estate investors, other homeowners, and other interested parties the opportunity to buy the home, usually for close to market rates.
However, because the auction itself costs money and the lender has – in theory – not been receiving payments for some time in most circumstances, most home lenders do not make back the full cost of the property because of the auction.
As a result, most homeowners will not receive any proceeds from the auction sale.
A foreclosure typically only makes sense when a lender has no other options left or if they do not believe the homeowner can be trusted further.
For example, if a homeowner has repeatedly been delinquent on regular monthly mortgage payments, has not contacted the lender, and has caused damage to the property, the lender may believe that foreclosure is the best way to recoup as much of the initial price of the property as possible.
That said, there are many alternatives to foreclosures, including forbearance programs. A foreclosure does not make sense if these alternatives have not been explored.
Typically, forbearance can only be used once. While certain extensions may be invoked to increase the foreclosure time frame, once forbearance has passed, the homeowner will not get a second chance to recover from their financial hardship.
Additionally, if a homeowner is still delinquent on their mortgage payments after forbearance, it is less likely that the lender will be willing to pursue another alternative, like a short sale or a loan modification.
In such circumstances, co-investment with Balance Homes might be a worthwhile alternative for homeowners who have trouble qualifying for a refinance and want to stay in their home. Balance Homes may be able to help you pay off your mortgage and remain an owner of your property by paying cash for a share of your home equity.
By retaining your home and taking proactive steps through debt consolidation, Balance believes we can help you rebuild your credit and financial health — and create your path back to traditional homeownership. Balance offers a 7-year term with no minimum: Sell, move, or refinance at any time within the period.
Balance Homes has already helped many homeowners avoid foreclosure and remain in their home through challenging financial circumstances. You can contact us today for more information.
Forbearance is a commonly used tool to try and give homeowners a break from their monthly mortgage obligations and prevent foreclosure. Forbearance allows you to defer monthly mortgage payments for a set period of time. Foreclosure may proceed if you continue to be delinquent on your mortgage loan, or don't have the ability to become current after the forbearance period.
No matter how dire the situation may seem, remember that foreclosure isn’t your only option. Alternatives like forbearance or co-investment with Balance Homes could help you keep your house. Contact us today!
Sources:
What is mortgage forbearance? | CFPB
