There’s a lot of breaking news right now surrounding the coronavirus pandemic, but loan forbearance is probably at the top of your client’s minds.
After all, being able to hit “pause” on mortgage payments sounds great–right? Not so fast. There’s a lot more to consider when it comes to loan forbearance. This is the time for you to prove yourself as a trusted advisor for your clients and professional partners. Let’s start with the questions your clients are asking you about forbearance:
What is Loan Forbearance?
Loan forbearance involves a borrower not paying their mortgage payments for a period of time, without their lender beginning the foreclosure process. However, at the end of the period of most forbearances, all of the payments will come due at once. For example, if a borrower forbears on a loan for 90 days, at the end of that time, all three months of payments will be due at once.
What is Loan Deferment?
Loan deferment, on the other hand, is a similar “freeze” on payments. However, the lender will add the deferred payments onto the life of your loan on the back end.
Why Does Loan Forbearance Matter Right Now?
Unemployment due to the Coronavirus is reaching highs that surpass even those during the Great Recession. Therefore, more and more Americans are having problems paying their bills. And since housing expenses make up between 16-30% of most individual’s expenses, mortgage payments are on the top of the list of concerns.
Because of this, the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act, has set many protections in place for Americans affected by the Coronavirus. For example, if an affected borrower pursues forbearance on their federally-backed mortgage, their credit will not be negatively affected. Keep in mind, that this only applies to those borrowers who were already up-to-date on their payments.
Many non-federally backed mortgages may still be eligible for relief options, so encourage your borrower to reach out to their servicer if they are unsure.
How Will Forbearance Affect Me?
Most of those who forbear on their mortgage during this time will have their mortgage payments delayed by 90 days. However, lenders do not forgive that debt, and interest continues to grow. In some circumstances, borrowers will be required to repay the lump sum due when the forbearance is over.
If your client is struggling to pay one month of their mortgage right now, it’s difficult to imagine that they will be ready to pay four months of payments at once down the road.
Some servicers are offering different repayment plans, but it depends on the borrower, the lender, and their agreement. Whether your borrower is required to pay a lump sum after the forbearance period, a series of smaller payments, or the missed payments are added onto the backend of the life of the loan, it’s critical that they know the exact terms of their forbearance repayment.
Will My Credit Be Affected?
Under normal circumstances, loan forbearance would negatively affect an individual’s credit. However, under the CARES Act, forbearance due to the Coronavirus will not impact a borrower’s credit.
For example, an account that was up-to-date before Coronavirus will keep appearing that way on credit reports. The borrower just needs to take the proper steps with their servicer. However, it’s important to note: the CARES Act credit protection will not wipe preexisting negative factors off someone’s credit score.
Should I Consider Loan Forbearance?
The first thing to help your client understand is: if they can still pay their mortgage, they should. There are many unanswered questions surrounding forbearance’s long term effects, and borrowers should not think of this as a “freebie.”
However, if your customer has lost their job or is otherwise having trouble paying their bills, mortgage forbearance may be a helpful option. Their top priority when applying for forbearance should be understanding the terms of the agreement. Will they need to repay the lump sum due all at once? Or will they be able to make a series of smaller payments? How long is their forbearance period?
How Do I Request Forbearance?
If your clients cannot make their mortgage payments, they need to start acting now. In order to have their credit protected, their mortgage payments need to be current. They also need to apply for assistance before they’re missed a payment. Inform your borrowers that they need to reach out to their servicer directly to request relief.
No documentation is required for borrowers to request forbearance from servicers. This is because the lender is not waiving the payments, simply deferring them.
While speaking with lenders, borrowers can also request that their credit reports include a natural disaster code. This does not protect their credit score directly. But, it is an extra safety net to indicate that they were negatively “affected by declared or natural disaster.”
If your borrowers are coming to you with questions about mortgage forbearance, do your research. Help them understand their options. Remember, if they can continue to pay their mortgage, they should! If they can’t, they need to call their servicer (before they’re in trouble with their payments), and work out a forbearance agreement.
This is an unprecedented time for most people–financially, socially, economically. So, be there for your customers in any way that you can.