Tolerance: Is it a good idea?

Do not do it!! Don’t you dare do it!!” Some good advice from a passionate financial expert. Barry Habib was discussing forbearance plans on a recent podcast aimed at real estate investors. I’ve been following Barry for a while, mainly because of his approach to lending. and his extreme intelligence when it comes to economics. Usually his advice is aimed at lenders, but this was very strong advice for real estate investors. There is a lot of hype about forbearance deals , and rightfully so, as they can be extremely attractive and very useful. Some of the rumors make them seem too good to be true, so I looked for the truth. Can ordinary investors, like you and me, take advantage of this even if they don’t do we need it financially?The short answer is yes, but it comes at a price.

A forbearance agreement in its simplest form is an agreement between a lender or loan servicer and a borrower not to make scheduled payments as originally agreed upon. Focusing on real estate loans, a forbearance agreement would prevent a loan servicer from foreclosing on the property during the term of the agreement. Until now, if you entered into a forbearance agreement on a home loan, it would stop a foreclosure, but it would still be reported as late payments on your credit.

So why all the hype? The CARES Act has made some dynamic changes around these agreements. First, loan servicers for government-backed or government-owned loans must issue forbearance agreements to anyone who wants them. Yes, that’s right, anyone who wants them. In the past, these deals were hard to come by and the borrower needed to qualify and document financial hardship. Now, if the loan is owned or backed by the government, each borrower will get 180 days no questions asked, which they can extend for a second 180 days if they wish. There are no fees or penalties for taking advantage of this. An important point that was a subject of confusion is that this money is not free. There may be no fees, but anyone who enters into this agreement will need to make up any late payments. An initial misunderstanding was that borrowers would have to make a lump sum payment for all missed payments. That would have created mass foreclosures, which created fear. It was because of this belief that many investors believed that we would see another housing bubble burst. The truth is that each loan servicer will have the flexibility to work out a payment plan for each individual borrower. While it is true that a lump sum payment is one of the five repayment options, it is not necessarily required. It is much more likely that an affordable plan will be put in place that will prevent a massive increase in foreclosures. In addition to the lump sum option, here are the four payment options a loan servicer might implement with each borrower.

  • Borrowers can pay the past due amount within 12 months after the forbearance ends.

  • Extend the term of the mortgage for the exact number of months of forbearance.

  • Add past due amounts to the loan balance and extend the term of the loan by the number of months needed to make the monthly payment equal to the previous payment.

  • Add past due amounts to the loan balance and extend the loan term by 40 years (480 months).

Basically, the borrower will be able to extend the term of the loan to offset these payments. These are specific to Fannie Mae and Freddie Mac. Other lenders or servicers of other types of loans may have slightly different options.

So if you automatically qualify and there are no fees, why wouldn’t you do this? Here are three death traps, which is why I think you should avoid doing forbearance deals on your mortgages if you can:

  • Depending on your payment option, the interest on these payments may increase. Since most of your payment will likely be interest, you’ll add interest to interest, which becomes very expensive in the long run. It will limit your borrowing power. Let me explain, while it is true that the CARES Act will prevent loan servicers from reporting late payments, the fact that you have signed this agreement will report it. Not reporting the late payment will keep your credit scores intact, but any lender who reviews payment history will see the forbearance agreement. I couldn’t find clarity on this, but most experts believe it will actually say “forbearance agreement” directly on the credit report for every agreement you enter into. I know this is true because three of the largest lenders in this country have already stated that they will create underwriting guidelines around forbearance agreements caused by COVID and will not extend credit for two to four years after the forbearance agreement. indulgence. That means just trying to get the system working and not making payments, you could be out of the game for two to four years! I’m not sure we will, but if this pandemic creates buying opportunities, it will surely be before I can borrow again.

  • By not making loan payments, you hurt the housing market as a whole. Removing the ethics of this decision, the more people who take advantage of the forbearance agreement, the less liquid lenders will have, which means the stricter the guidelines will be. This, of course, reduces the demand for housing.

What’s interesting about all of this is that loan servicers don’t understand the ramifications of putting you in a forbearance agreement. It’s the lender that owns the loan and the lenders that will originate new loans that understand this, but unfortunately that’s not who you’re talking to when you call your mortgage company to ask about it. I want to make it very clear that leniency is a fantastic option if you need it. Help people in need and help maintain home values ​​as we get through the COVID crisis. I only recommend against doing it if you can afford to continue with the payments. I also want to mention that these rules and privileges are for government loans only. Third-party lenders such as banks, credit unions, and private lenders are not subject to these guidelines.

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