What is Forbearance?
Forbearance is a temporary agreement between a borrower and their mortgage servicer that reduces or suspends monthly mortgage payments for a defined period, typically 3-12 months. Unlike a loan modification that permanently changes the loan terms, forbearance is a short-term pause designed to help borrowers through temporary financial hardships like job loss, medical emergency, or natural disaster. The missed payments are not forgiven -- they must be repaid through one of several repayment options when the forbearance period ends.
Forbearance gained widespread attention during the COVID-19 pandemic when the CARES Act required mortgage servicers to offer forbearance to borrowers with federally backed loans who experienced COVID-related hardship. At the peak in 2020, over 4 million homeowners were in forbearance. The subsequent exit from forbearance created a wave of distressed property activity that investors closely monitored for deal opportunities.
How forbearance works
The borrower contacts their mortgage servicer and requests forbearance, typically providing documentation of the financial hardship. If approved, the servicer agrees to either reduce the monthly payment to a lower amount or suspend payments entirely for the agreed period. During forbearance, the servicer cannot charge late fees, report negative information to credit bureaus (for CARES Act forbearances), or initiate foreclosure proceedings.
When forbearance ends, the borrower must address the accumulated missed payments. The repayment options typically include reinstatement (paying all missed payments in a lump sum), repayment plan (adding a portion of the missed payments to each future monthly payment over 6-12 months), loan modification (permanently changing the loan terms to incorporate the missed payments), or deferral (adding the missed payments to the end of the loan as a non-interest-bearing balance due at payoff or sale).
Forbearance and the investment market
Forbearance creates a temporary dam in the foreclosure pipeline. While borrowers are in forbearance, their properties can't enter foreclosure. When forbearance ends, borrowers who can't resume payments or arrange alternative repayment face a wave of potential foreclosure that they've delayed but not avoided. For investors, monitoring forbearance exit data in target markets helps predict future distressed property inventory.
Homeowners exiting forbearance who can't afford the post-forbearance repayment options are potential motivated sellers. They may have equity in the property but can't afford the payments. A sale -- even at a discount -- lets them walk away with cash rather than losing the property to foreclosure. Understanding the forbearance timeline helps investors time their outreach to pre-foreclosure homeowners.
For subject-to investors, properties coming out of forbearance require careful analysis. The deferred payments may be added to the loan balance, increasing the total debt. Any past-due amounts must be brought current before the loan can be assumed in a subject-to transaction. Verify the exact forbearance terms and current loan status with the servicer before structuring a deal.