I was invited to write this article for the Rental Housing Association of Washington (RHAWA). This was originally published in the April 16, 2020 edition of the RHAWA newspaper.
On March 18, 2020, Fannie Mae and Freddie Mac announced their recommendations related to
forbearances during the COVID-19 pandemic. With more and more states adopting or extending
their respective shelter-in-place orders, and more uncertainties lie ahead, many property owners
have reached out to seek input on whether they should consider a forbearance with their
lenders. To answer that question, a property owner must consider the impacts to the borrower,
the impacts to the lending ecosystem, and the possible alternatives.
What is a forbearance?
A forbearance is a temporary postponement of a borrower’s regularly scheduled mortgage
payments. It can be a partial forbearance, in which one is still required to make a reduced
monthly payment, or a full forbearance, where the entire payment is put on hold.
A forbearance is most helpful in providing temporary relief for sudden, unexpected hardships
that are expected to be resolved in less than a year. Common example would be a natural
disaster, in which the property requires repairs and there may be a delay in receiving insurance
proceeds. Forbearances have always been around, even before the COVID-19 pandemic.
What happens after the initial forbearance period?
Terms vary between lenders, but a property owner generally makes up the difference between
the reduced payment and the actual payment at the end of the forbearance period in one lump
sum payment, or elects a repayment plan over an agreed-upon number of months.
How do I apply for a forbearance?
Talk to your loan servicer and ask them what options they may have. Note that loan servicers
have been dealing with heavy call volume, so you may experience a long wait-time.
What are the impacts of obtaining a forbearance?
People have been asking whether they should take advantage of the new forbearance options
made available. The short answer is NO. Do not do it unless you really have to.
If you request a forbearance, you may not be able to get another mortgage for a very long time.
A forbearance means you are unable to make payments for mortgage #1 as previously agreed,
and as a result, you should not and would not qualify for mortgage #2.
In addition, there is always a chance that a loan servicer makes an error in the credit reporting
process. Obviously, dealing with a loan servicer’s customer service to correct the error is often a
painful and difficult process. In many cases, you will need an attorney to help you resolve these
Will obtaining a forbearance adversely affect me if I have good income and credit?
Yes. Although a forbearance should not adversely affect your credit, it would still affect your
ability to obtain your next loan. Lenders have already started asking borrowers if they had ever
skipped a payment or requested a forbearance. Answering yes may disqualify you for the new
loan. Lenders are extremely concerned about delinquencies, defaults, and their ability to sell the
loan upon origination. If the borrower fails to make their first payment, the loan immediately
becomes unsellable and ultimately becomes a huge liability to the lender. If you have previously
obtained a forbearance, it signals to the lender that there is a higher probability that you will
default on your mortgage payments.
Are there any alternatives?
Look into different grants and loans. If you own rental property, you may be eligible for
assistance from the Small Business Administration (SBA) in the form of grants and loans. Have an
open dialogue with your tenant if they are going through tough times. The Rental Housing
Association of Washington (RHAWA) has great resources which you can share with your tenant if
they have difficulty in paying rent.
Most importantly, stay safe and healthy during these times!
From six-feet away,
Adrian Chu is a full-service real estate professional based in Seattle and San Francisco. Adrian is the Founder & Principal of CHU Design + Build (an urban infill residential development company) and Specialty Real Estate Group (a full-service residential and commercial real estate services company). Adrian is a Managing Broker in WA, Broker in CA, Principal Broker in OR, as well as a Mortgage Loan Originator (MLO-920749) in WA and CA. Adrian is a proud Husky with a Master of Business Administration and Bachelor of Science in Electrical Engineering from the University of Washington. In his previous life, Adrian held various technical lead and program management roles with several FORTUNE 100 technology companies.
Adrian can be reached by phone or text at (206) 407-5452 and by email at Adrian@AdrianChu.com.