Category: Housing

CARES Act: Housing

Millions are people are out-of-work, furloughed, or have had their hours reduced. One of the first payments that often goes when times are tough is the mortgage or rent payment. It is generally a person’s largest bill (representing 25-50% of many people’s budgets) and not making that large payment can be seen as a way to continue purchasing things that are necessary right then (such as food and utilities).

If you, or a client you are working with, is struggling there is some relief in the CARES Act.

As is always the case in situations like this, TALK WITH YOUR LANDLORD OR MORTGAGE SERVICER ahead of time. Let them know what is going on. There are programs and policies in place, not just with the CARES Act, but in many states, cities, and companies. Chances are there is a program in place to help, but your best bet is to contact them before the payment is due.

Let’s take a look at both rent/eviction and mortgages/foreclosure and what provisions are in the CARES Act for each.

RENT/EVICTION

It is estimated that 1/3 of Americans did not pay rent or only paid partial rent in April. Under the CARES Act tenants cannot be evicted for non-payment of rent if their landlord has a federally-backed mortgage (which would include, among others HUD, VA, USDA, Fannie Mae, Freddie Mac, and public housing).

This moratorium on evictions last for 120 days starting on March 27, 2020. After that the tenant needs to be given 30 days notice before they can be evicted.

It is important to note that this is not free money or free rent – the rent is still due, and the tenant can be evicted after the moratorium is over. Also this provision only applies to non-payment of rent – eviction can continue for other reasons such as violating the terms of the lease or damage to the property.

No additional fees, penalties, or other charges can be added beyond the rent payment.

It is important to remember the effect this is having on landlords as well. For most landlords rentals are their livelihood and they are concerned about the implications of the economic shutdown on their business and on their tenants.

In addition to the CARES Act provisions, many states have passed laws temporarily banning evictions. Columbia Law School and other lawyers have put together a database that outlines eviction orders in place in all 50 states.

How do you know if your landlord has a federally-baked mortgage? The only way to find out for sure is to ask them. If the landlord is not forthcoming about information or they illegally start the eviction process (officially or unofficially) you may need to talk with a lawyer.

If you are a landlord it is possible to qualify for an Economic Injury Disaster Loan through the Small Business Administration. As of April 20 the program was out of money, but there is talk in DC about Stimulus 3.5 which would appropriate more money to the program. When (or if) a deal is reached, this article will be updated.

Landlords may also qualify for mortgage forbearance (described below) under the CARES Act.

MORTGAGES/FORECLOSURE

If you can pay your mortgage, pay your mortgage. If you cannot pay your mortgage, reach out to your servicer as soon as possible.

Under the CARES Act there is a moratorium on foreclosures for federally-backed mortgages, which includes U.S. Department of Housing and Urban Development (HUD), USDA, FHA, VA, Fannie Mae, and Freddie Mac loans.

Fannie Mae and Freddie Mac hold about half the mortgage loans in the US. You can ask your servicer who backs your loan.

Under the CARES Act lenders cannot begin or finalize a foreclosure for 60 days starting March 18.

If a borrower cannot make their payment there is a forbearance provision available, which will pause or reduce payments. The borrower does not need to provide any documentation other than a statement that they need to take advantage of the forbearance.

The initial forbearance lasts for 180 days, with a 180 day extension available if needed.

During the forbearance only scheduled interest can accrue, and the loan has to be reported as current to the credit bureaus.

To take advantage of this borrowers need to contact their loan servicer. They should also discuss a plan for making up the payments in the future. For most borrowers that will mean re-casting their payments to the end of the loan term. Borrowers should avoid sending in partial payments unless their lender agrees to apply those payments to the balance and not end the forbearance.

On either a rental or mortgage deal you should get all provisions of the deal in writing.

 

How We Almost Lost a Home

by Ryan H. Law

About 15 years ago my wife and I moved to Indiana, excited to start a new adventure far from where we both grew up. We rented a great apartment that fit our needs and expenses. It was close to the library and shopping, not too far from my work and it had a nice pool. It was perfect.

build a homeHowever, after a while, we got restless. We wanted to own a home. After all, that is the American Dream, right? So we started looking for homes. We found a brand new community that was being built, and they offered 100% financing. We picked out a home we liked and put down some earnest money, then they started building it. What an exciting time!

There were some red flags, though. The first one was that we couldn’t actually qualify for the loan on our own. We didn’t have enough income or credit history. The sellers used some “creative financing strategies” to get us qualified, which involved using a tax credit that would bring our income up. We also had to get a co-signer.

Red-FlagAnother red flag was that we had no money for a down payment or closing costs. Of course, to the seller, that was no problem. They could just roll it all in to the loan.

We really couldn’t afford the payment, either, but we were excited about the home and figured if we qualified, that things would work out. We drove out nearly every day to see the progress on our home.

At some point, though, reality set in. We really couldn’t afford this home. We panicked and contacted the seller, asking to be released from our contract. Of course, they said no. We were committed. We explained that we couldn’t really afford it, but that didn’t deter them. We had a real estate lawyer look over our contract. He said he couldn’t see a way out. We weren’t sure what to do.

We got lucky, though. They had committed to have it done by a certain date, but they got behind on construction. We were able to argue that they had broken the contract, and we were therefore no longer bound by it.  They let us get out of the contract and sent our earnest money back.

Perhaps they also realized that if they had forced us to follow through, we might have lost the home in a foreclosure or short sale, which would have looked bad in this brand new community.

We ended up moving shortly after that, and have been very cautious about home buying since that time. In fact, we waited more than 7 years before we actually purchased our first home.

Along the way we have learned some important lessons. Before you buy a home, I recommend you consider the following:

  1. Make sure your income is stable.
  2. Have 3-6 months’ worth of expenses in an emergency funds in the bank.
  3. Pay off ALL high interest debt (credit cards, vehicles, student loans, etc).
  4. Save up 20% for a down payment. If you put down at least 20%, you don’t have to pay Private Mortgage Insurance (PMI). PMI is generally 1% of the loan annually. On a $200,000 home that will be $2,000 per year, or $166 a month. That’s a lot to be adding to a mortgage payment each month.
  5. Make sure your TOTAL home cost (Principal, Interest, Taxes, Insurance, HOA fees) is no more than 25% of your take home pay. The lender will likely qualify you for much more than you can afford, but stick with your price range. Let your Real Estate agent know exactly the price range you are looking at, and stick with it. We were fortunate to find a great Realtor® in Missouri[1] who helped us find exactly what we were looking for in the price range we were comfortable with. Find someone you trust who will help you do what is best for you, not their commission.
  6. Remember that homes come with extra expenses. For example, if the water heater goes out in your home, you have to pay for a new one. Experts recommend that you save anywhere from 1-4% of your home’s value per year for maintenance and repairs. On a $200,000 home that is $2,000 – $8,000. While $8,000 is probably a bit high, the reality is that you will have to pay for repairs.
  7. I recommend that, on top of repair money, you have enough saved up to pay your insurance deductible. After all, if the roof gets destroyed in a hail storm, the insurance company will pay most of the repairs, but you have to pay your deductible first. That can be anywhere from $1,000 – $5,000.

Buying a home can be a great decision. In general, homes appreciate in value, meaning that you should be able to sell it in the future for more than you bought it for. Even that isn’t always true, though. Remember 2008? Some markets have yet to fully recover from that housing crash. Go slowly and buy what you can afford when you are ready.


 

[1] A shout-out to our friend and Realtor® Ted Webber: http://www.tedwebber.com/.