Forbearance is a temporary postponement or reduction of loan payments granted by a lender or loan servicer to a borrower who is experiencing financial difficulty. The term forbearance refers to the temporary postponement of loan payments, typically for a mortgage or student loan. The literal meaning of forbearance is "holding back". Forbearance works differently depending on whether you have a federal or private student loan. Here are some things to consider before asking for forbearance:
- You are still responsible for the interest accrued during a forbearance period.
- Federal student loan servicers can grant forbearance for up to 12 months at a time.
- Private student loan forbearance varies and is more limited than the federal program.
- Some servicers charge borrowers a flat fee to place loans into forbearance for a period of three months.
- General forbearance may provide relief from loan payments when you are faced with steep medical bills, unemployment, or significant income reduction.
In the context of a mortgage process, forbearance is a special agreement between the lender and the borrower to delay a foreclosure. It needs to be understood that the type of forbearance being granted is being provided based on the customers individual circumstances. For example, borrowers in short-term financial difficulty would be more likely to be approved for either a (short term) full moratorium or negative-amortizing deal than customers in long-term financial difficulty, where the lender would at all times seek to ensure that the capital balance continues to be reduced (via an amortizing forbearance arrangement) . A lender who grants a forbearance is refraining from enforcing its right to realize interest on securities under their agreement or contract with the borrower.
