This week, Advisor Malea Southward of Team TruNorth addresses a current hot topic: the mortgage forbearance offered through the CARES Act. If you took advantage of this option and are thinking of purchasing a home, read on! Malea’s clients recently learned an unfortunate lesson about the fine print of this program.
2020 has been a difficult and uncertain year for many Americans. Under the CARES Act homeowners were offered the opportunity to take a break from mortgage payments for a limited amounts of time in order to support the economy and to limit the number of foreclosures that would put people further in debt. One thing that was important about mortgage forbearance was that these deferred payments would be tacked on to your mortgage time but not negatively affect your credit score with what would have otherwise been delinquent payments, a win-win for many people.
While this sounds like a no brainer if Covid has made your world a bit shaky, there is always the small print to deal with. I recently had a transaction where I was working with buyers who had been looking for the perfect replacement property for a long time. They had finally found exactly what they wanted and were ready to make an offer. They had good credit, a pre-qualification letter from their bank, and a house that would sell quickly in a competitive market; everything they needed to make their dream a reality. The one hiccup was that they had taken advantage of the mortgage forbearance program, a seemingly solid financial choice in an uncertain world and a town that depends on tourist dollars for its economy to run smoothly.
The pre-qualification letter, while definitely a very important first step, is not a guarantee of anything. When pushed about the mortgage forbearance not being an issue, the lender recanted and said that underwriting would most likely not approve the loan. Even if they paid the lump sum of the forbearance taken they would in addition still need three months of on time mortgage payments to qualify for a new loan. They were lucky since they had a VA loan–a conventional loan would require twelve months of on time mortgage payments before the borrower could qualify. These clients ended up not being able to move forward on their purchase, a heartbreaking lesson but an important one.
Moral of the story: be sure you know all the caveats of government programs and any programs that offer mortgage relief. Find a lender you trust and that is knowledgeable of all the fine print in any mortgage programs. If you are thinking of beginning your home search, reach out to your trusted advisor–we are happy to provide recommendations for trusted local lenders!