The term “forbearance agreement” is a technical legal term for an agreement between a lender and a borrower.  The real estate forbearance agreement is used when a lender on commercial real estate loans agrees to postpone foreclosure on a delinquent loan in return for certain promises made by the borrower.

For example:  a borrower has missed several monthly payments and the commercial real estate lender has the legal right to put the loan into default and begin foreclosure.  However, the borrower for various reasons is convinced that they can resume making payments to catch up on the amount in default over a period of six months.  The lender puts into writing that they will agree not to declare a default and agree not to file the foreclosure so long as the borrower lives up to their side of the deal and makes the normal scheduled payments along with a certain additional amount added to each over the following six months.

This can be a win/win scenario for both parties.  The lender doesn’t end up owning the real estate and the borrower avoids having the real estate foreclosure show up on their credit. Also, the borrower avoids actually losing title to the property.  In Colorado it is important to put this type of agreement in writing.  This formalizes the “deal” and can avoid serious legal issues that might occur if the lender and borrower end up disagreeing about what how the “workout terms” should be interpreted.

The moral to this story is to follow the single most important rule for borrowers who run into difficulty in their commercial real estate loans:  communicate – communicate – communicate! Without good communication between borrower and lender the chances for a good outcome are very poor.  With it, the chances to save the property are greatly improved.

[google_authorship], because of his more than 40 years of experience in funding hard money loans, is considered an authority on hard money or bridge financing.  He frequently speaks at meetings and conferences and writes articles on these subjects.