The Difference Between Forbearance and Foreclosure

Life happens, and sometimes things come up that we can’t avoid. The good news is that when we enter a mortgage financing arrangement, we have options – your mortgage company will often work with you to find a workable arrangement, because a foreclosure is costly and time consuming – they want you to stay in your home as well!

During this time, you’ll likely hear a few different terms, but they are easy to understand once you look at the pros and cons of each.

Forbearance

Forbearance arrangements are really useful for homeowners who are having temporary financial difficulties such as loss of a job or illness. With forbearance, the homeowner expects that they will overcome the financial difficulties they are facing and will be able to resume paying their mortgage payments as scheduled within a few months, they just need a temporary break to catch up.¹

With a forbearance arrangement the homeowner and their mortgage company come together to agree to a specific period in which mortgage payments and their associated fee accumulation will be paused without threat of foreclosure, giving the homeowner time to catch up.² Once the forbearance period is over the homeowner is expected to pay the past-due balance accumulated during the forbearance period, plus keep up with upcoming regularly scheduled mortgage payments.

What To Do If You Need a Forbearance Arrangement

There are a few simple steps you’ll need to take.

1. Get in contact with your mortgage company ASAP.

Give your mortgage company a call and speak with a representative. You’ll need a few different pieces.

• Your mortgage account or loan number.
• Your monthly income before taxes, similar to how you originally applied for the loan.
• Your monthly expenses broken down in a list.
• Your unemployment benefits statements if you are receiving unemployment benefits.
• An overall explanation of your current financial situation, backed up by the pieces above.

Using these pieces, talk your situation through with the representative. The representative likely has been trained to handle these situations and will have an honest, non-judgmental conversation with you about your expenses and how to start on the path to brining your mortgage payments up to good standing.

2. Request a forbearance agreement and submit the paperwork.

After your conversation with the representative at your mortgage company breaking down your options, if applicable, ask to enter into a forbearance agreement.

3. Wait for the response to your request and keep in touch.

Once a negotiator or loan officer has been assigned, they will review your case and determine if forbearance will be a possibility. If you are deemed able to enter a forbearance agreement, the loan officer will get to work on creating your agreement, and when it is finished, they’ll likely mail it to you. In reality, this can take a few weeks – but keep your head up high, you’re taking the steps to make things right!

4. Receive, review, and sign your forbearance agreement.

Once your forbearance letter and paperwork come in, review it carefully – this can be the difference between getting on track and foreclosure. The paperwork will likely cover time frame, how many payments there will be and how much whey will be set at, fees and fees attributed, and outstanding balance left due after the period is over. If anything seems off or unattainable for your budget, it is important to contact your negotiator or loan officer as soon as possible.

Foreclosure

Foreclosures are similar in concept to unpaid rent. In the case of a foreclosure, payments have not been made to the mortgage company financing the property, and now the loan company is preparing to take possession of the property since a payment has been missed.³

A notice will typically go out after 30 days from a missed payment, meaning you are one month behind on your mortgage payments. This letter will also include details on the options available and length of time offered to make a payment and bring the account current.⁴

The good news is that as long as you can bring your account current, no further action is needed other than being sure that future payments are on time.

If your account isn’t brought up to date, the lender could go a few different routes.

1. They could file a nonjudicial foreclosure – This allows them to take possession of the property. The timeframe will already be included in your mortgage paperwork.
2. They could also file a judicial foreclosure – This way the lender will file a lawsuit against you to receive the legal right to sell your property. This option is typically only used when a mortgage is behind for more than 90 days, three months without any payments or arrangements made.

Next, the lender will make moves to fully foreclose on the property.

Should foreclosure proceed, Federal law dictates that lenders must give 120 days’ notice, meaning you have four months to make new arrangements and move out of the property. However, each state has its own rules that can change this amount or adjust it – be sure to know what your states’ laws are surrounding foreclosures.⁵

Once the suit has been filed, judicial or nonjudicial, you’ll be mailed a notice indicating the date that you must vacate the property or you will be legally evicted. If you need more time you can contact the lender, but there are no promises that they will be able to comply with the proposed timeframe you request – in fact, they are legally not obligated to offer any further assistance.

Sources:

1. https://mortgagedepot.com/what-you-need-to-know-forbearance-versus-foreclosure/#:~:text=While%20a%20homeowner%20may%20request%20forbearance%20for%20temporary,or%20her%20right%20to%20take%20back%20the%20property
2. https://www.investopedia.com/terms/f/forbearance.asp
3. https://www.investopedia.com/terms/f/foreclosure.asp
4. https://www.usa.gov/foreclosure
5. https://www.fool.com/the-ascent/mortgages/articles/got-a-foreclosure-notice-from-your-lender-heres-what-to-do/