Forbearance Agreements And Covid-19

This article will discuss forbearance agreements during Covid-19 and what to be aware of as a consumer. We will answer the following questions:

• How does the CARES Act affect forbearance?
• Is my credit score negatively impacted under the CARES Act?
• What should you be aware of before entering into a forbearance agreement?

The Covid-19 crisis continues to expand as a record number of Americans test positive, land in the ICU, and succumb to the virus. While the stock market has seen considerable gains, many sectors of the economy struggle to bounce back. The CARES Act included provisions to protect homeowners from foreclosure, but those provisions are set to expire on December 31st, 2020. Without an extension, a significant percentage of homeowners will lean heavily on their forbearance to bridge the gap. 

How Does The CARES Act Affect Forbearance?

While the CARES Act allows borrowers to enter into forbearance for up to 12 months, the bill didn’t contain any provisions dictating the terms of forbearance agreements. One borrower’s forbearance agreement might be drastically different from the next. 

The CAREs Act makes it easier for those seeking forbearance to qualify if they have coronavirus-related health or financial issues. Those with federally-backed mortgages only need to contact their lender and explain that they cannot pay their bill due to the pandemic. Mortgage lenders are required to grant forbearances regardless of the borrower’s delinquency status. The CARES Act also removes the need to provide certain evidence and documentation customarily required for forbearance approval. However, lenders may ask for documentation at a later date.

Is My Credit Score Negatively Impacted Under The CARES Act?

Under the CARES Act, applying for forbearance has no detrimental effect on your credit score. The CARES Act legislation includes a temporary amendment to the Fair Credit Reporting Act (FCRA) that protects credit scores under extenuating circumstances. Essentially, when forbearance is reported, your loan account is frozen until the forbearance terminates. However, this information is still present on your credit report and may impact a lender’s decision.

What Should You Be Aware Of When Entering Into A Forbearance Agreement?

Forbearance agreements are meant to give borrowers some breathing room, but they don’t freeze the interest that accrues on the loan, and they’re not a free year of no mortgage payments. Under a forbearance, the missed payments must be repaid within a given period determined by the lender.

Many lenders will stretch out missed payments — including principal, interest, taxes, and insurance — over three to twelve months, resulting in a higher overall monthly payment once the forbearance concludes.

Other lenders will offer forbearance agreements that include a balloon payment. A balloon payment moves all the money missed during the forbearance and tacks it onto the end of the loan as one lump sum. The missed amount must also be paid off if you sell your home. Balloon payment forbearances are less common as the lender is taking a risk if you don’t finish paying your mortgage. If your lender offers you the balloon arrangement, confirm that they are not charging you interest on the missed payment amount.

While it should go without saying, you should thoroughly review any forbearance agreement that your lender presents. Furthermore, having a real estate lawyer review the documents will go a long way towards minimizing any unexpected payments. Making partial payments, if possible, is also a great way to lessen the delayed financial impact of forbearance.