Mortgage forbearance is a real estate agreement made between homeowners who are delinquent on payments and mortgage holders who allow for a deferral of payments. Mortgage forbearance agreements allow homeowners facing financial hardships to pay reduced payments or skip payments for a set amount of time. During the mortgage forbearance, the lending bank agrees not to proceed with foreclosure against the homeowner.
Mortgage forbearance agreements are followed by repayment plans. The repayment plan includes past due payments, accrued interest charges, and other fees incurred during or before the forbearance agreement. During mortgage forbearance, homeowners work with the bank loss mitigation department to develop a workable repayment plan.
Bank loss mitigators collect and review financial documents submitted by the borrower to ensure a forbearance agreement is in the best interest of both parties. Once a mortgage forbearance agreement and repayment plan is established, the bank loss mitigator follows the case and makes sure the homeowner meets the terms.
Mortgage forbearance can work in favor of the real estate investor. Many mortgage repayment plans do not work because the homeowner is unable to make regular monthly payments and the additional payment required to pay off past due amounts. When homeowners fall behind during the repayment plan the lender can proceed with foreclosure proceedings.
If mortgage forbearance fails and the lending bank continues with foreclosure proceedings, real estate investors can take advantage of short sales. A short sale occurs when lenders agree to accept less than is owed on the mortgage note. Short sales require considerable paperwork and the homeowner must be able to prove their property is worth less than the balance of the mortgage note.
Once homeowners default on the mortgage forbearance, real estate investors can purchase properties at foreclosure auctions. However, the minimum bid at foreclosure auctions is oftentimes current market value or higher. The asking price is contingent upon the mortgage note balance, accrued interest and foreclosure fees.
If the homeowner defaults on the mortgage forbearance and the foreclosure auction does not produce a bid, the property becomes a bank owned or real estate owned (REO) property. An REO property oftentimes provides a larger profit than a short sale or foreclosure auction property. The longer the lending bank holds onto a property, the more desperate they are to sell. Holding onto property costs lenders money in taxes and maintenance fees. Therefore, if lenders receive a reasonable offer they are usually eager to eliminate the property from their portfolio.