October 5, 2020

Through The Looking Glass: The Reality of Forbearance in Real Estate Investing

With its impeccable release and timing early this year (March 27, 2020) “CARES ACT” which gives real estate investors the option for applying forbearance for a backed-up mortgage seemed like the next big thing. 

The reality of such a concept is that we should know what we are getting into since the pandemic isn’t something that will last for the rest of our lives and neither will the financial support flow weekly. 

Your best bet in further taking advantage of forbearance and the need to apply such would be to fully understand the concept and weigh in the pros and cons of such action. This will,  in return, prepare you for long term goals and actions to ensure that you aren’t drowning yourself in crippling debt. 

Here are the things that you should consider before taking action:

What is Mortgage Forbearance?

The misconception that we should break is the idea that mortgage forbearance is an avenue wherein your mortgage has dwindled to a cheaper price or is omitted from your record. The idea of applying for such is to prolong or extend the repayment as a form of relief, allowing borrowed to gain breathing room to manage and sustain their finances. Just because you were allowed to extend your dues does not imply that you are out of it. It means that you would still have to process the payments after the application and duration of the aforementioned “forbearance”.

People will always  claim it’s “Free Money” but it isn’t. Should you wish to believe so, you will realize  that by the time you have to pay for these dues, you would then again complain with regards to the expense. Apply for such only if you need the time to manage finances, if you are within a reasonable situation wherein you wouldn’t need to do so, we strongly suggest that you shouldn’t. 

Before the CARES act, forbearances were already evident and practiced amongst lenders after evaluating financial hardships experienced by their consumers/customers applications backed with documentation. However, the CARES Act today allows borrowers with a federally backed mortgage to get forbearance relief up to six months without the need to show proof of hardship which means  that they are allowed to do so without the needed evidence. Leading to several people applying for such even if it wasn’t necessary.

How can you qualify for Forbearance under CARES ACT?

Again, as mentioned, anyone can apply for the mortgage forbearance should they have understood the contract that they are getting into, they have to remember that their loans must also be within these agencies to qualify for the benefit. 

  • Freddie Mac or Fannie Mae
  • FHA loans
  • VA loans
  • USDA loans

After the forbearance period, federally backed loans do not require repayment of suspended mortgage payments in one go. The aforementioned services will allow you to repay them through a method that can be paid overtime. 

Private loans 

Private loans, on the other hand, are not required or mandated to grant you forbearance, this connotes the idea that since they are not within government constraints, they need not abide by the CARES Act.

It is on that note dependent on the lender if they would wish to conjure up the same idea offered by the government, this will be within their limitations and the agreement between the lender and the buyer therefore may not have the jurisdiction in the court of law.

Don’t agree to forbearance terms or in the end miss to pay? Since it isn’t a way to relieve you of your mortgage and loans but more of just an assistive manner to help you get by. Make sure to read contracts up to the fine print before getting into them.

When you are eligible for “Foreclosure”?

As a homeowner with a mortgage to pay, the pandemic isn’t a walk in the park especially when expenses pile up and you are within breach of unemployment. You may maximize the option to apply for forbearance to ensure that you aren’t taken advantage of during these tough times.

The foreclosure process is different in every state, however,  the federal law states a loan servicer can’t start nor initiate the state foreclosure process until your loan is more than 4 months past your due date. Your account will not be marked as “past due” if you have a forbearance payment processed with your servicer.

Is your credit score affected by forbearance?

No, forbearance can save your home without putting a dent on your credit score. 

Congress temporarily amended the Fair Credit Reporting Act under CARES in line with the aforementioned statement to protect individuals from taking a hit on their respective credit scores. With that being said, there should be no impact on your credit if your forbearance is approved through your lender or lending service (Both private and federally acclaimed).

It is mandated by law that the lender mark the borrower under “current ” state with regards to their payment status. The accommodation agreements are protected under the CARES Act as long as they are made between January 31, 2020, and until 4 months after the national emergency is officially lifted, unless called otherwise. 

Disclaimer: The blog articles are intended for educational and informational purposes only. Nothing in the content is intended as legal or financial advice.