Forbearance Agreements and Repayment Plans as Legal Options to Prevent Foreclosure
A loan modification is often the most stable alternative to a foreclosure if you are struggling to keep up with your monthly payments. However, if a loan modification is not an option for you, a forbearance agreement or a repayment plan may be a feasible solution. These arrangements are temporary, in contrast to the permanent solution offered by a loan modification. They may be appropriate when you have not fallen far behind in your payments and expect your financial situation to improve in the near future. On the other hand, if you do not foresee any improvement in your ability to make monthly payments, you probably should pursue a different alternative to a foreclosure, such as a short sale or a deed in lieu of foreclosure.
Forbearance agreement = an agreement that a lender will not begin foreclosure while a homeowner’s payments are temporarily reduced or suspended
Repayment plan = an agreement that a lender will not begin foreclosure while a homeowner’s payments are increased to make up for previously missed payments
A forbearance agreement is an assurance by the lender to refrain from starting the foreclosure process for a limited period, even though it is not receiving full payments. The lender and the homeowner may agree to pause payments entirely during this time, or they may agree on a reduced payment. However, the forbearance agreement will require the homeowner to make full payments as provided under the original terms of the loan once the forbearance period ends. They also will need to make an extra payment to account for the payments that they missed. The extra payment will include interest and taxes as well. Each forbearance agreement is specific to the situation and can be negotiated individually with the lender.
If your lender is accommodating, it may extend the period of the forbearance agreement if your financial situation does not improve by the time that you expected. However, your lender otherwise will have the right to pursue a foreclosure if you do not start making full payments when the agreement expires.
While a forbearance agreement is arranged in advance to cover a certain period, a repayment plan is arranged after the homeowner has missed payments already. It accounts for a temporary hardship that has been resolved rather than a temporary hardship that is starting or ongoing. Depending on the amount that is overdue and your record of past payments, a lender may be willing to let you spread out the missed payments over a certain period. It will add a percentage of the overdue amount to each regular monthly payment during that period, and you will need to pay the total amount. Once you have completed each of these enhanced payments, your monthly payment amount will revert to the original rate.
A homeowner may contact a HUD-approved housing counselor for help with negotiating a repayment plan.
Repayment plans may last for a few months or close to a year. The length will depend on how much the homeowner can pay. If you need assistance in negotiating a repayment plan, you can get advice from a counselor approved by the Department of Housing and Urban Development (HUD) or an attorney.
As with forbearance agreements, the main drawback to a repayment plan is simply that it is only a temporary measure. If you fall behind on your payments again, the lender will be able to start the foreclosure process, and it may be less willing to agree to one of these alternatives a second time.