Forbearance Agreement: What is Forbearance on Business Loan / Mortgage
Many small businesses are currently suffering financial hardship due to COVID-19 and shelter-in-place orders that have closed several for weeks or even months. Those who own their buildings or own other businesses may worry about foreclosure as the cash flow stops.
Paying the bills, including the monthly mortgage payment if you have a commercial mortgage, can be more difficult than ever. With all the other economic stimulus packages we see in this pandemic, is there any relief from mortgage lenders? Do you have the option of temporarily suspending your mortgage payments?
The good news is that many banks and lenders offer forbearance agreements. Read on to find out more.
What is a forbearance agreement?
Typically, if a borrower stops paying a commercial real estate loan, the lender has the right to evict the tenant and foreclose the property. However, with a forbearance agreement, the bank, credit union or other mortgage lender agrees to temporarily stay the action.
It’s not automatic: As a borrower, you may have to prove financial hardship to avoid foreclosure on your mortgage. The lender may or may not accept a forbearance.
Does abstention harm your credit?
This shouldn’t, as long as you have a formal forbearance agreement with your lender. But keep an eye on your credit to make sure no late or missing payments have been mistakenly reported.
Are companies eligible for a forbearance agreement?
Although the CARES Act provides mortgage forbearance for federally guaranteed mortgages, it does not specifically cover commercial real estate loans. However, we are seeing many commercial lenders offering commercial loan forbearance agreements as an option for borrowers.
From a lender’s perspective, it is better to withhold mortgage payments in the hope of eventually receiving them again than to foreclose and then try to sell a property, especially given the difficult economic conditions. We all hope that the cash flow problems that many businesses suffer from will be short-term and that we can resume these mortgage payments in the near future.
Be aware, however, that forbearance agreements are at the discretion of each lender: if your business is in serious difficulty with little chance of recovery, the bank may decide that you may not be able to resume paying your mortgage later. and reject your forbearance request.
Commercial mortgage forbearance requirements
Each lender will have their own mortgage forbearance application process, so check with your lender’s website for exact requirements. Do not wait until the loan payment is due before applying; Naturally, lenders are inundated with requests right now and it can take weeks for you to get a response. You don’t want to risk having your credit scores negatively affected due to a late mortgage payment. (Check your free business credit scores now for a baseline.)
Typically, you will need to be able to indicate that the tough times your business is going through are temporary and that you expect to get back on your feet and pay off that mortgage soon.
CARES Law and Commercial Lending Forbearance
While there is no specific program or policy requiring banks to offer forborne from commercial lending with the CARES Act due to financial hardship, the Federal Reserve, FDIC and other federal regulators and states encourage financial institutions to work with borrowers to avoid foreclosure.
Besides mortgage forbearance, many banks offer other types of relief, such as waiving late fees and deferring payments.
Challenges Commercial Mortgage Lenders Face in the COVID-19 Pandemic
Businesses are not the only ones to suffer from this situation. Mortgage lenders, too, find themselves strapped for capital because of the hundreds or thousands of missed payments from their borrowers.
It’s a ripple effect: if a small business can’t stay open, it may not be able to pay its rent. Then the owner of the building cannot pay the mortgage. The lender, at the end of the chain, is left with the decision to push for foreclosure or wait for this financial crisis that has affected us all.
How to negotiate a forbearance agreement or commercial mortgage relief
Find out if your mortgage lender offers business loan forbearance or other financial relief. Then get several financial and loan documents in order. Read your loan agreement to see if it says how to apply for forbearance. Otherwise, check the financial institution’s website, looking specifically for information on borrowers affected by COVID-19.
You will likely need to provide a written request stating why you need mortgage relief for your loan, as well as how long you expect to need the deferral period. You may need to provide financial projections for next year, although this is understandably difficult given the circumstances. You may be asked for the financial statements and the role of 2019 year-end and year-to-date rents, as well as the financial statements of any owner-occupiers.
If you have a relationship with a specific banker this may be your best bet as calling the 800 number can take a while as you are one of the many trying to set up a forbearance plan.
Once you can talk to someone, ask what sort of forbearance or loan modification options you have. Will you be charged late fees or interest while payments are suspended? What is the process if you need to extend the forbearance? Make sure you understand your options, then read the Forbearance Agreement carefully, if offered one.
Make sure you know when your next mortgage payment is due, especially if it’s months away, so you don’t accidentally miss it and risk fees or even foreclosure.
Nav’s final word: forbearance agreements
If there is a good thing about the situation you find yourself in these days, it is that you are far from alone. Lenders expect borrowers to request forbearance relief, and most have procedures in place to streamline the request for loan deferral.
Even if your business isn’t able to operate at full capacity and you have a temporary reprieve to pay your mortgage, get a plan for how and when you can make those payments again. Some of the CARES Act SBA loans could help you. Learn more about the Paycheck Protection Program and more about EIDL as a financial tool that can help you in the meantime.
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