To Bear Or To Forebearance

As explained in a recent HUD handbook: “Forbearance agreements are generally classified as informal, formal or special. Any delinquent mortgagor [homeowner] may be offered forbearance. Mortgagees have greater flexibility in the use of informal or formal forbearance agreements than they do for special forbearance agreements. Repayment plans and forbearance agreements must always be realistic and based upon the mortgagor’s ability to pay.” Remember, these plans and programs are to be based on your client’s ability to pay.

As with any forbearance agreement (informal, formal, or special) in which the mortgage lender does not need HUD approval, your client may be considered for FHA’s Special Forbearance Provision provided that:

1) your client has experienced an involuntary reduction in income or an increase in living expenses; and

2) the mortgage lender determines that your client has the financial ability to pay in accordance with the terms of the forbearance agreement.

Let’s look at the three types of forbearance agreements.

1) The Informal Forbearance Agreement is a verbal agreement and is used when the delinquency is relatively small. The term of a verbal agreement is usually less than 6 months.

2) The Formal Forbearance Agreement (repayment plan) is a written agreement. The length of a formal forbearance agreement may be as long as 18 months on an FHA loan. However, we have found that many mortgage lenders will allow the formal forbearance agreement to last for a period of time equal to the number of months your clients are behind in mortgage payments subtracted from 18 months.

For example, if your client is five months behind when the mortgage lender offers the agreement, the lender may allow a formal forbearance agreement to last up to 13 months (18 − 5 = 13). However, we usually ask for at least 12 months in our proposals for reinstatement (when we are requesting a formal forbearance agreement). If your client has an FHA loan, we suggest that you never ask for less than a 12-month forbearance agreement.

3) The Special Forbearance Agreement is a Loss Mitigation tool intended to give the mortgagor (homeowner) more assistance than is available with any other type of forbearance agreement (formal and informal). For instance, with special forbearance, the mortgage lender has the authority to suspend or reduce your client’s mortgage payments for up to 18 months without HUD approval.

This type of forbearance agreement is the hardest forbearance to qualify for, and we have found the most lenders would prefer offering a formal forbearance in lieu of a special forbearance.