What is Forbearance in California?

Forbearance is an agreement between a lender and a borrower to temporarily suspend or reduce mortgage payments due to financial hardship. This is not the same as forgiveness – the borrower still owes the missed payments. Forbearance can provide temporary relief for homeowners facing a short-term financial setback, allowing them to remain in their home while they get back on their feet.

Table of Contents

1. Forbearance in California
2. How Does Forbearance Work in California?
3. Pros and Cons of Forbearance
4. Alternatives to Forbearance
5. Seeking Professional Advice

1. Forbearance in California

California has laws in place to protect homeowners, including the California Homeowner Bill of Rights. These laws can impact how forbearance agreements work for California residents. For example, lenders may be restricted from pursuing foreclosure during the forbearance period.

2. How Does Forbearance Work in California?

• Requesting Forbearance: Homeowners must contact their lender and demonstrate a valid reason for the request, such as job loss, medical emergency, or divorce. The lender may request documentation, such as proof of income loss or medical bills. It’s important for homeowners to reach out proactively, as forbearance is typically granted only to borrowers who are current or nearly current on their mortgage.
• Terms of the Agreement: The forbearance agreement will outline the length of the agreement, the amount of payments to be missed or reduced, and how the missed payments will be repaid. For example, the borrower may agree to make a lump sum payment at the end of the forbearance period or have the missed amount tacked onto the end of the loan. Homeowners should carefully review the terms to understand their obligations.
• Ending the Agreement: At the end of the forbearance period, the borrower must resume regular payments and repay the amount missed during the agreement. If the borrower is still struggling financially, they may need to explore other options, such as a loan modification.

3. Pros and Cons of Forbearance

• Pros: Temporarily avoids late fees and damage to credit score. Allows homeowners to stay in their home during a temporary financial setback. Forbearance can be a good option for borrowers who expect their financial situation to improve in the near future.
• Cons: The missed payments are not forgiven and must be repaid. There may be taxes owed on the amount missed, as it can be considered taxable income. Forbearance can also make it harder to qualify for a new loan, as lenders may view it negatively.

4. Alternatives to Forbearance

Depending on the situation, alternatives might include a loan modification, short sale, or deed in lieu of foreclosure. A loan modification can permanently reduce the borrower’s payments, while a short sale or deed in lieu of foreclosure are options for borrowers who cannot afford to keep their home.

5. Seeking Professional Advice

Homeowners considering forbearance should consult with a housing counselor or attorney to understand their options and the terms of any agreement. These professionals can help borrowers navigate the process and avoid potential pitfalls. Homeowners should never sign an agreement they don’t fully understand.