U.S. Real Estate: Forbearance and Relocation
When the U.S. CARES Act was implemented in March, one provision allowed mortgage holders to request a forbearance of their mortgage if they were experiencing a hardship as a result of the COVID-19 pandemic.
What is forbearance?
A mortgage forbearance is an agreement between a mortgage lender/servicer and a borrower to pause the mortgage payments for a specific period of time. Typically, at the end of the forbearance period, the borrower either renegotiates the term of the loan or adds the amount owed to the backend of the mortgage.
***It is important to note that forbearance is not a payment waiver or forgiveness program.
The CARES Act requires that lenders automatically grant a forbearance for 6 months, without penalty or impact on credit. At a borrower’s request, the initial six months must be extended by an additional six months.
We are starting to see some of the implications and perhaps unintended consequences of forbearance on relocation.
Example: Let’s assume a borrower’s monthly payment is US$2,000 and they put their mortgage in forbearance for a year. Following the year, if the borrower cannot pay in one lump sum, the US$24,000 due is added to the balance of the loan. If the borrower only put down 3-5% when they bought the house—and the house has not appreciated much—then the homeowner may owe more on the home than what the home is worth.
In this scenario, it might be difficult for a relocating employee in a Home Sale Program to sell their departure home based on the need to pay off negative equity prior to Cartus acquiring the home. Alternatively, the employee may need to negotiate a short sale.
Additionally, when a borrower with a loan forbearance applies for a mortgage at their new location, they could face some new hurdles. Current lending rules require a borrower be out of forbearance and up to date on payments. The CARES Act does not mandate how servicers work out repayment of the amount due. If the servicer “modifies” the loan, a borrower is not eligible for a new mortgage for two years according to current Fannie Mae and Freddie Mac underwriting provisions.
What do relocating employees need to consider?
- Consider a 401k hardship loan first. The 10% penalty is waived due to the COVID-19 crisis and the tax implication can be spread out over three years.
- Speak to a lender for pre-qualification for the destination home ASAP to ensure eligibility to purchase a new home right away.
What does this mean for our clients?
When completing final equity, Cartus will review client policy to determine whether to service or payoff the existing mortgage.
- In either situation, Cartus will work with the lender to determine the payoff amount or confirm the monthly payments.
- If our client’s policy includes loan servicing, the mortgage account will be brought up to date by making multiple payments, including any late fees, if applicable. Once the account is current, Cartus will continue to service the loan until closing with the third-party buyer.
- Based on this, our clients may receive exception requests to allow Cartus to pay off the loan at acquisition in order to avoid a housing hardship for employees at their destination.
- The lender may require, based on underwriting, that the departure loan be paid in full before a new loan can be approved (similar to Veteran's Affairs [VA] loans requiring payoff before a veteran can secure a new VA loan).
Contact your Cartus Account Manager to consider blanket approval for loan payoff if an employee is closing on a new home prior to the departure home closing.
As always, we look forward to bringing you updates and creative solutions to ensure a positive experience for your employees!