The Cares Act Mortgage Forbearance: Right For You?
The Covid-19 Coronavirus has led to some challenging times for all of us. The Government has created the CARE Act, to assist homeowners whose income may have been adversely impacted by the coronavirus. One of the components of the CARE Act is the possibility of mortgage forbearance.
Overviews for Forbearance Under The CARES Act:
- Forbearance allows the borrower to pause payments, however, repayment is expected in full over time.
- Some lenders have tightened lending standards because of forbearance because the loan servicer must still make payments to the bondholder.
- Lenders must reserve cash, limiting cash available to loan.
- Therefore, mortgage companies are less willing to lend to “riskier” borrowers. Interest rates are low for well-qualified buyers.
Forbearance is often misinterpreted. And while it is intended to help, it can have some dangerous repercussions. Many people are mistakenly thinking that forbearance equals forgiveness. It does not.
They don’t typically just put the payments at the end of the loan, like sometimes happens with a car loan. Forbearance means that the payments will be suspended for a short period of time, initially up to 6 months, but will need to be caught up when the forbearance period is over.
Think about when you buy something at a furniture store that offers “no payments” for 3 months. You still must pay for the furniture…the payments are just deferred.
But mortgage forbearance is even worse if the borrower has dug themselves in a deep hole and can’t catch up. Should this happen, the lender will enforce their right to be paid, which may cause the borrower into foreclosure. They would also likely all their equity in their home in the process.
Unintended Consequences of the CARES Act on the Mortgage Lending & Real Estate industry
Some lenders are tightening lending standards because of forbearance. Why? Forbearance allows the delay of payments from the Borrower (you) to the loan servicer (your bank), but the loan servicer must still make principal and interest payments to the bondholder, and make your property tax and insurance payments when they are due.
In forbearance, although your payment is not coming to the lender, cash must go still out from them. Many of the companies that originate mortgage loans are also Borrowers. Lenders must conserve cash, reducing the cash available to make new loans. To reduce this burden, these companies tighten standards so they only take on the loans that have a very high likelihood of not entering forbearance. Some lenders have stopped originating new loans altogether due to this economic uncertainty.
Mortgage interest rates are low for well-qualified Borrowers. Rates for lower credit score Borrowers are rising as banks raise rates and tighten lending standards on those considered to be “riskier” Borrowers with a higher likelihood of forbearance or default. This is even more prevalent for those Borrowers looking at Government insured or Jumbo financing options. This is unfortunate, when now more than ever these Borrowers may need lower monthly payments and overall financial relief.
For homebuyers, these tighter lending standards and higher interest rates can also make it difficult to close on the sale of a house when contingency for the sale of a current home exists.
The CARES Act includes a moratorium on foreclosures and evictions due to non-payment of rent. Some purchase agreements require the removal of a tenant or the completion of a foreclosure sale. The CARES Act may delay these purchase agreements, and putting Earnest Money at risk.
Forbearance is a scary thing and should only be used as a very last resort. There may be some special exception due to these circumstances buy typically they allow you to skip maybe 3-6 payments but when you start making payments they either want all the back du money or they spread it out over the next 6 months payments. Which will, of course, increase their payments substantially.
Why Not Request Forbearance?
Forbearance is designed to help those as a measure of last resort. But it is in no way a free pass and may have serious consequences with long-standing repercussions to your financial health.
Your Lender can say they won’t report the payments as late but they also can’t report the payments as being made either. This could end up being a problem, it’s not unusual for loan approvals being contingent upon the last 12 months of mortgage payments being made on time. How will this be looked at when this is over? Will Lenders look at people who forebear as higher risk and either deny the loan or charge a higher rate? My guess is that’s it’s highly likely to occur.
Depending on your situation, a much better option could be to refinance your existing loan. Refinancing could help by eliminating your high-interest debts, lowering your monthly mortgage payment, or giving you a cash cushion during these turbulent times.
Things To Consider
Considering the unintended consequences of the forbearance provisions of the CARES Act outlined above, if mortgage holders request forbearance even if they can make their mortgage payments on time, the likelihood of even tighter lending standards and higher interest rates increases dramatically. If too many mortgage holders request forbearance, the mortgage lending market could freeze up as servicers and lenders are required to set aside more and more cash, taking money away from lending.
- Mortgage holders who file for forbearance must sign an attestation to a financial hardship caused by the COVID–19 emergency. Signing a false attestation can invalidate the protections given under the CARES Act.
- The mortgage payments will still be due at the end of the forbearance period. Services may require the delayed payments to be paid as a lump sum at the end of the forbearance period.
- Failure to meet the terms of the forbearance agreement can be reported negatively against the mortgage holder’s credit report.
- Some lenders will not refinance a loan that is currently in a forbearance agreement, making it difficult to take advantage of today’s historically low-interest rates.
- Not all mortgages are eligible for forbearance protections under the CARES Act. Mortgage holders must be certain their mortgage is covered, or their credit could be negatively impacted by entering a forbearance agreement.
Keller Mortgage during this SHIFT!
Are you familiar with Keller Mortgage? They entered the market with aggressively competitive rates and quick turn-around times. They offer a variety of loans to homeowners and homebuyers alike.
Keller Mortgage (KM) is located in Dublin, OH. On average, each Keller Mortgage Loan Officer closes over 20 deals/month and has more than nine years of experience behind them.
- KM is continuing to lend through this turbulent time while balancing market risks!
- KM is here to refinance to lower payments, consolidate higher-interest debt, or to receive cash-out to reduce the impact of the financial hardships created by the COVID-19 emergency.
- KM is turning FULL FREE Underwriting Pre-Approvals around usually within the day and holding rates at near all-time lows.
- Month to date, Keller Mortgage has locked hundreds of millions of dollars for clients & our average locked rate has been under 3.5%!
Zero Plus Program
The ZeroPlus Loan Program is EXCLUSIVELY available through KW Agents. Not just for homebuyers! Refinances are also a part of the ZeroPlus program, as long as you were referred by a Keller Williams agent. The only requirement for using the ZeroPlus Loan program is that you are working with a Keller Williams agent, or buying a Keller Williams listing.
Need a KW agent in your area? Save time and contact me. I’ll be happy to refer you to an agent with a good track record in your local market anywhere in the USA. The PLUS is a $1000 credit that applies to loans over $150k and can be used towards third party expenses such as your closing costs.
- Zero Lender Fees
- Plus $1,000 Toward 3rd Party Costs*
- and a great, low rate!
Keller Mortgage encourages buyers to submit a complete loan application and their financial docs, right upfront. Not only does this give you the strongest pre-approvals, but upon getting financial docs, we will have an underwriter review your application within 24 hours. That puts you in the best position to make a strong offer when you find that perfect home.
Keller Mortgage’s minimum loan amount is $65,000 with a minimum credit score of 600.
- Primary, Vacation, and Investment homes (Residential 1-4 Units)
- Purchase and Refinance (cash-out too)
- Conventional –min. 3% down payment (all can be a gift for qualified applicants)
- Fannie Mae – DU
- Freddie Mac – LP
- FHA – min. 3.5% down payment
- VA – $0 down payment
- USDA – $0 down payment
- JUMBO – up to $3 million
Want more information? Here’s more facts and actual numbers. Click for more information.
Your Two Cents
Feel free to post your questions and/or comments below. I’ll do my best to answer them for you and point you in the right direction. If you need a KW agent in your area, let me know! I have access to all agents in the USA through Keller Wiliams network and can recommend one to you within 24 hours.