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Forbearance and The CARE Act

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The CARE Act has been enacted to help people who have been impacted by COVID-19 through loss of job and financial difficulties that might ensue with this however, it’s important to understand the forbearance piece of this. Forbearance, when dealing with a loan, is not forgiveness. First off, to apply. you don’t need to show loss of job under the CARE act. Once you apply you have opted to forgo your next 6 months of payments on your mortgage. These payments, however, are not forgiven and that is where the questions lie. On a side note, but worth mentioning, is that at the end of the 6-month period you have the option to apply for an additional 6 months of forbearance if you are still experiencing financial hardship.

How the forbearance payments are paid at the end of the period is the question most people will want answered and there isn’t a straightforward answer for you, but I want to educate you the different options. First of all, it depends on your servicer and the details of your contract. This can either be a balloon payment, a 50% increase on your mortgage payment over time, or it can be tacked on at the end of the note whether it’s a 15- or 30-year note. The government rolled out this program under the CARE Act to help homeowners who are affect by COVID-19 however have not done a good job explaining what this means. It’s not something you want to enter into lightly unless there is a real need because if you aren’t able to pay back your mortgage as outlined by your servicer, they will start foreclosure proceedings.

This was an issue that devastated families in 2008 and led to decreased home values. The housing market is very strong right now and people have more equity in their homes than we have ever seen before which is very different than what we saw in 2008. This is why it’s important to be educated on the CARE Act so a year down the road you know what this is going to look like and ensure that all the options are explored including forbearance. When looking at the CARE Act as whole, there several areas that are listed  as additional solutions such as extended unemployment benefits or employee sponsored 401K’s or traditional IRA’s where the 10 % withdrawal fee is waived right now, limits are increased on what can be taken out and the 3 year tax is deferred on taxes owed if taken out as income. These two options don’t have the credit implications that forbearance might have and is a way to borrow from yourself temporarily.

If you have equity in your home, you can do a cash out refinance and receive several thousand out of your home now to create a nest egg which you may or may not need. Downsizing is also an option that might be explored during this time. Interest rates are low and purchasing a smaller, less expensive home can be an option to reduce monthly expenses. If you absolutely have to go the forbearance route and end up not being able to repay the mortgage, selling your home is a viable option as to not affect your credit. As of right now, we do not know how forbearance will affect your credit, however we are certain that it will be noted. We also do not know what the credit overlays will be, which are additional guidelines that are created at the origination side vs servicing side. These additional guidelines might be stricter such as a 24 month wait time until you can apply for another mortgage as those type of things are being talked about and nothing is in place yet. This just came out a week ago Sunday, so it is fluid, and nothing is set in stone. If you have additional questions on this matter or anything happening in the industry right now don’t hesitate to reach out.

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