When a homeowner becomes delinquent on his mortgage, he may arrange to repay the past due amount through a forbearance agreement. The lender agrees to put off, reduce or eliminate the past due amount in the forbearance agreement during a temporary period of time, during which interest accrues. In addition, the lender agrees not to foreclose on the home during the forbearance period. If the homeowner defaults on the forbearance agreement, problems arise.
Getting a Response from Loss Mitigation
To qualify for a forbearance agreement, the borrower must usually be a minimum of three months delinquent on payments. To avoid foreclosure, the borrower must request a forbearance agreement from the lender's loss mitigation department. The forbearance agreement must last a minimum of 4 monthly payments, although the delinquent balance can't exceed 12 monthly payments. Lenders don't always make it easy for borrowers to qualify; as of the time of publication, so many borrowers are delinquent on their home loans that loan mitigation departments are swamped with forbearance, short sale and other requests. Whether or not a lender is likely to approve a forbearance agreement varies greatly among lenders, and response time is often slow.
If the borrower defaults on the forbearance plan, the lender often has the right to proceed immediately to foreclosure, because in exchange for agreeing to forbear payments the borrower forgoes the right to fight foreclosure (although there are additional remedies that the borrower can take, such as petitioning for bankruptcy). While it's possible for a borrower to negotiate another forbearance agreement, it's unlikely; however, the borrower may be able to turn the house over to the lender in a deed-in-lieu of foreclosure deal. In a DIL, the borrower turns the deed over to the lender and walks away from the loan.
Because forbearance permits a borrower to temporarily reduce or eliminate payments, this change is reported to the three major credit bureaus, Equifax, Experian and TransUnion -- this results in a significant reduction in the borrower's credit score. Keep in mind that even though the lender agreed to a forbearance plan, the borrower is still technically in default by not meeting the original loan terms. As a result, reduced credit standing can affect other areas of the borrower's life by making it difficult to secure future loans. It may also cause the borrower's other creditors to reduce or eliminate her credit lines.
Even if the borrower successfully completes a forbearance plan, there is ample evidence that suggests the same borrower will default on the mortgage again, according to the website MortgageStrategy.co.uk. The lender that doesn't address the underlying reason for the default -- for example, a high interest rate or a short repayment term -- increases the risk that the same problem will occur, especially if the homeowner's equity stake has declined because of declining property value. As a result, it's wise for the borrower and lender to consider modifying the loan, which should increase the chance that the borrower will be able to satisfy its terms in full.
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