Do not do it!! Don’t you dare do it!!”. Some great advice from a passionate finance expert. Barry Habib was discussing forbearance plans on a recent podcast aimed at real estate investors. I’ve been following Barry for a while, mostly because of his focus on lending. and his extreme intelligence when it comes to the economy. Usually his advice is aimed at lenders, but this was very strong advice for real estate investors. There’s a lot of hype out there about deals of leniency, and rightly so, as they can be extremely attractive and very useful. Some of the rumors make it sound too good to be true, so I searched for the truth. Can ordinary investors, like you and me, take advantage of this even if we don’t 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. If we focus on real estate loans, a forbearance agreement would prevent a loan servicer from initiating a foreclosure 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 report 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 agreements were hard to come by and the borrower needed to qualify and document financial hardship. Now, if the loan is government owned or backed, each borrower will get 180 days with no questions asked, which they can extend for a second 180 period if they want. There are no fees or penalties for taking advantage of this. One important point that was a source of confusion is that this money is not free. There may be no fees, but any person entering into this agreement will be required to make up any late payments. An initial misunderstanding was that borrowers would have to make a single payment for all missed payments. That would have created massive 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 repayment plan for each individual borrower. While it is true that a lump sum payment is one of five repayment options, it is not necessarily required. An affordable plan that prevents a massive increase in foreclosures is much more likely to be established. In addition to the lump sum option, these are the four payment options that a loan servicer might implement with each borrower.

• Borrowers can repay the amount due within 12 months after the forbearance ends.
• Extend the term of the mortgage by the exact number of months of forbearance.
• Add past due amounts to the loan balance and extend the loan term by the number of months needed so that the monthly payment is the same as 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 that I think you should avoid forbearance on your mortgages if you can:

• Depending on your payment option, the interest on these payments may increase. Since most of your payment will probably be interest, it will increase interest on 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 checks your payment history will see the forbearance agreement. I couldn’t find clarity on this, but most experts believe that it will actually say “forbearance” directly on the credit report for every agreement you enter into. I know this to be 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 that by simply 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 defaulting on loan payments, you hurt the housing market in general. Stripping away the ethics of this decision, the more people who take advantage of the forbearance agreement, the less liquidity 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 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.