A forbearance is a mechanism used to help borrowers with financial difficulties due to natural disasters, unemployment, or accidental injury. However, because the borrower will agree to a deal obligating them to repay the loan within a specific time frame, this type of help will not erase the balance owed on the associated mortgage. For lenders, forbearances can range from a simple arrangement with your borrower (such as a temporary payment postponement) to a sophisticated agreement to assist a borrower through a loan default (including staged payments, requirements to sell loan collateral or the addition of new collateral or guarantors).
There are several available options for lenders to provide forbearance options to borrower’s requests, some of which are:
- Default payments to be repaid during existing mortgage: Borrowers are allowed to temporarily stop making payments for a defined period under this sort of forbearance agreement, but they must pay back the whole outstanding debt when their payments become overdue.
- Default Payments to be repaid at the end of the mortgage: This forbearance arrangement allows the borrower to delay payments for a specified length of time, after which the total amount defaulted is returned either by adding it to the end of the mortgage loan or by the borrower taking out a new loan at the end of that mortgage.
- Reduced Payments: Borrowers can reduce their repayments by a fixed percentage for a certain length of time with this type of forbearance structure. Borrowers have one year to repay the accumulated decreased amount after this initial forbearance period.
When underwriting the forbearance terms, lenders should be sure to re-evaluate the borrower so that the agreement is substantiated on the parties’ circumstances. To read more on forbearance and available alternatives it provides for lenders, click here.
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