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COVID-19 and Forbearance

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COVID-19 is taking a severe toll on the balance of American life, leaving millions jobless and accruing outstanding debt in the form of bills and missed mortgage or rent payments. The federal government recently passed the CARES act to try to blunt the blow to our economy by giving renters and homeowners the option of going into forbearance rather than risking foreclosure or eviction.

Beware the fine print…

If you are experiencing financial hardships caused by the corona virus forbearance allows you to temporarily suspend payments but beware of the fine print! The terms of forbearance are dictated by your loan servicer, not the federal government, so there will be significant differences in what “forbearance” entails based on your lender.

Specific terms of forbearance…

The terms of forbearance can include a wide variety of verbiage, the majority of which is designed to protect the lender, not the borrower. For example, many consumers are finding that the forbearance programs offered by their lenders require them to pay back the full amount at the end of the forbearance period. Or the lender may raise the payments for a period after the forbearance ends to account for the amount owed. In both situations interest never stops accruing through the term of the forbearance, likely causing you to pay more over the term of the loan than you would have without a forbearance.

Best forbearance terms…

The best forbearance terms are when lenders allow you to add the forbearance period to the end of the loan, effectively extending the maturity date of the loan. In this scenario you still end up paying more in interest over the term of the loan, but you are not burdened with massive lump sum payments or inflated monthly bills once the forbearance ends.

Is my loan government backed?

Additionally, only government backed loans are required to offer forbearance, i.e. FHA, VA, USDA, Fannie Mae and Freddie Mac. If your loan is not government backed, there is no guarantee that your request for forbearance will be approved. If you don’t know if your mortgage is backed by the federal government you can use the free search features on the Fannie Mae (https://www.knowyouroptions.com/loanlookup) and Freddie Mac (https://ww3.freddiemac.com/loanlookup/) websites, or you can look on your mortgage statement to see if you pay FHA insurance, or, if you still have your closing documents, you can check your HUD statement for the 13-digit HUD identification number that would indicate the loan is federally backed.

Does not erase what you owe…

Most importantly, in no situation does forbearance erase what you owe. It is imperative that borrowers understand what is within the bounds of possibility and not be lured in by scams and charlatans offering terms that are simply too good to be true. In Mandarin the word “crisis” is created by adding together the symbols for “danger” and “opportunity”. The wisdom in this observation is especially potent (and perhaps ironic?) in our current context; where there is crisis, there will inevitably be those who seek opportunity at the expense of others. Be careful and make sure to do your research before making any decisions.

Best place to start…

If you are looking for more information on forbearance for borrowers experiencing COVID-19 related hardships the best place to start is here: http://www.consumerfinance.gov/coronavirus. If you need more specific assistance or the advice of experienced professionals, the helpful staff of Sellstate Alliance Realty and Property Management would be more than happy to assist.

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