What is Forbearance?
Forbearance is a temporary reduction or postponement of loan or mortgage payments agreed upon by the lender and borrower. It is designed to provide financial relief during periods of hardship such as unemployment, medical emergencies, or natural disasters. During this period, borrowers may either make reduced payments or no payments at all, depending on the terms of the agreement.
Purpose of Forbearance
The primary goal of forbearance is to offer financial relief and prevent severe consequences such as default or foreclosure. By temporarily suspending or reducing payments, borrowers can avoid damaging their credit scores and facing legal action or repossession. Forbearance acts as a bridge between financial hardship and recovery, allowing borrowers to regain their financial stability without suffering long-term repercussions.
How Forbearance Works
Obtaining forbearance involves a formal agreement between the borrower and lender. Here’s how it typically works:
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Formal Agreement: The borrower must request forbearance from the lender and agree on the terms.
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Duration: The length of the forbearance period varies but is usually several months.
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Adjusted Payments: During this time, payments may be reduced or suspended entirely.
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Deferred Payments: The missed payments are typically added to the end of the loan’s repayment schedule or amortized over the remaining loan period.
It’s important to note that interest may continue to accrue during the forbearance period, increasing the total amount owed.
Types of Forbearance
There are several types of forbearance tailored to different types of loans:
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Mortgage Forbearance: Often used in cases of economic downturns or natural disasters to avoid foreclosure.
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Student Loan Forbearance: Available for borrowers facing financial difficulties with their student loans.
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Other Loan Forbearance: Applies to auto loans, personal loans, and credit cards.
Benefits of Forbearance
The immediate relief provided by forbearance is invaluable for borrowers struggling to make payments. Here are some key benefits:
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Avoiding Foreclosure/Default: Forbearance helps prevent severe consequences like foreclosure or default.
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Preserving Credit Scores: By avoiding missed payments or default, borrowers can protect their credit scores.
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Temporary Financial Breathing Room: It provides a much-needed break from financial obligations during difficult times.
Eligibility for Forbearance
To qualify for forbearance, borrowers must demonstrate temporary financial hardship. Here are some key criteria:
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Financial Hardship: Borrowers must show evidence of temporary financial difficulties such as job loss, medical issues, or other unforeseen circumstances.
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Lender Approval: The lender must approve the request for forbearance based on provided documentation.
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Documentation: Borrowers need to submit supporting documents to validate their hardship claim.
Repayment After Forbearance
Once the forbearance period ends, borrowers have several repayment options:
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Adding Missed Payments: Missed payments can be added to the end of the loan’s repayment schedule.
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Amortizing Postponed Payments: Deferred payments can be spread out over the remaining loan period.
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Balloon/Lump-Sum Payment: In some cases, borrowers may need to make a single large payment to cover all deferred payments.
Special Considerations: COVID-19 and Federally Backed Mortgages
Under the CARES Act, federally backed mortgages have specific provisions for forbearance:
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180-Day Forbearance Period: Borrowers have the right to a 180-day forbearance period with potential extensions.
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Different Requirements/Benefits: These plans differ from standard forbearance in terms of requirements and benefits, offering more lenient terms due to the pandemic.
Risks and Considerations
While forbearance offers significant relief, there are potential risks to consider:
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Increased Interest Accrual: Interest may continue to accrue during the forbearance period, increasing the total amount owed.
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Impact on Credit Scores: If terms of forbearance are not met, it could negatively impact credit scores.
Step-by-Step Guide to Requesting Forbearance
Here’s a step-by-step guide on how to request forbearance from your creditor:
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Identify Lenders: List all your lenders and prioritize them based on urgency.
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Prepare Questions: Have questions ready such as how long the forbearance will last and what happens after it ends.
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Use a Script: Use a script when negotiating with your creditor to ensure you cover all necessary points.
