For Many Property Owners, Obtaining a Forbearance May Not Be the Best Idea
On March 18, 2020, Fannie Mae and Freddie Mac announced their recommendations related to forbearances during the COVID-19 pandemic. With more and more states adopting or extending their respective shelter-in-place orders, and more uncertainties lie ahead, many property owners have reached out to seek input on whether they should consider a forbearance with their lenders. To answer that question, a property owner must consider the impacts to the borrower, the impacts to the lending ecosystem, and the possible alternatives.
What is a forbearance?
A forbearance is a temporary postponement of a borrower’s regularly scheduled mortgage payments. It can be a partial forbearance, in which one is still required to make a reduced monthly payment, or a full forbearance, where the entire payment is put on hold.
A forbearance is most helpful in providing temporary relief for sudden, unexpected hardships that are expected to be resolved in less than a year. Common example would be a natural disaster, in which the property requires repairs and there may be a delay in receiving insurance proceeds.
Forbearances have always been around, even before the COVID-19 pandemic. What happens after the initial forbearance period?
Terms vary between lenders, but a property owner generally makes up the difference between the reduced payment and the actual payment at the end of the forbearance period in one lump sum payment, or elects a repayment plan over an agreed-upon number of months.
How do I apply for a forbearance?
Talk to your loan servicer and ask them what options they may have. Note that loan servicers have been dealing with heavy call volume, so you may experience a long wait-time.
What are the impacts of obtaining a forbearance?
People have been asking whether they should take advantage of the new forbearance options made available. The short answer is NO. Do not do it unless you really have to.
If you request a forbearance, you may not be able to get another mortgage for a very long time. A forbearance means you are unable to make payments for mortgage #1 as previously agreed, and as a result, you should not and would not qualify for mortgage #2.
In addition, there is always a chance that a loan servicer makes an error in the credit reporting process. Obviously, dealing with a loan servicer's customer service to correct the error is often a painful and difficult process. In many cases, you will need an attorney to help you resolve these reporting errors.
Will obtaining a forbearance adversely affect me if I have good income and credit?
Yes. Although a forbearance should not adversely affect your credit, it would still affect your ability to obtain your next loan. Lenders have already started asking borrowers if they had ever skipped a payment or requested a forbearance. Answering yes may disqualify you for the new loan. Lenders are extremely concerned about delinquencies, defaults, and their ability to sell the loan upon origination. If the borrower fails to make their first payment, the loan immediately becomes unsellable and ultimately becomes a huge liability to the lender. If you have previously obtained a forbearance, it signals to the lender that there is a higher probability that you will default on your mortgage payments.
Are there any alternatives?
Look into different grants and loans. If you own rental property, you may be eligible for assistance from the Small Business Administration (SBA) in the form of grants and loans. Have an open dialogue with your tenant if they are going through tough times. The Rental Housing Association of Washington (RHAWA) has great resources which you can share with your tenant if they have difficulty in paying rent.
Most importantly, stay safe and healthy during these times! From six-feet away,
Adrian Chu is a full service real estate professional – he buys, sells, invests, develops, builds, and finances real estate in Washington and California. Adrian is a Mortgage Loan Originator (MLO-920749) in WA and CA, Real Estate Managing Broker in WA, Real Estate Broker in CA, and a certified real estate instructor. Local to Seattle, Adrian is a proud Husky with a Master in Business Administration and Bachelor of Science in Electrical Engineering from the University of Washington. He can be reached by phone or text at (206) 407-5452 and by email at Adrian@AdrianChu.net.