By Russ Wiles Arizona Republic | Care of USA Today
The coronavirus outbreak and resulting economic slowdown have increased financial stress and borrowing needs for many people. New loans might not be easy to obtain, especially if your employment income has dropped, but relief is available.
The recently enacted CARES Act, which also is providing stimulus payments and small-business incentives, addresses credit needs and borrowing in various ways. Here are some of the key provisions tied to loans:
Mortgage relief possible
The Coronavirus Aid, Relief, and Economic Security Act provides several levels of relief to home-loan borrowers, including the right to request two periods of mortgage-payment forbearance or suspensions totaling up to 360 days.
“No additional fees, interest or penalties can be assessed for the forbearance,” said the National Association of Realtors in a report, though regular interest can still accrue.
This provision applies to borrowers with government-backed mortgages such as those insured by Fannie Mae, Freddie Mac, HUD and the Veterans Administration. People with mortgages held by other lenders should contact those companies if they’re seeking assistance. Many banks and other lenders also are suspending payments or offering other help, at least on a case-by-case basis.
Keep in mind that any deferred payments still need to be made eventually, as a lump sum or tacked onto the end of your mortgage, warned AARP. “Forbearance is not the same as loan forgiveness," the group said.
The CARES Act also prohibits foreclosures for 60 days from March 18, except for abandoned or vacant properties. And owners of multifamily properties who were current with payments on their federally backed mortgages as of Feb. 1 may request payment forbearance for 30 days, with extensions that can total another 90 days.
“Borrowers receiving the forbearance may not evict or charge late fees to tenants" during this period, the NAR said. Many states, including Arizona, also have implemented their own eviction postponements.
Homeowners able to refinance mortgages in the coming weeks or months could enjoy nice savings, thanks to rock-bottom levels of interest rates. According to an example provided by Lending Tree, borrowers today could save nearly $60 per month — or about $700 a year in payments — for every $100,000 borrowed, compared to a year ago, when interest rates were about one percentage point higher.
However, high demand for loans and tighter underwriting standards could delay or derail the refinancing process for some applicants.
Many borrowers "may need a higher credit score, perhaps a lower debt-to-income ratio, and a larger down payment,” said Bankrate.com in a commentary. “If you want a new mortgage or refinance, it’s going to take a fair amount of patience and shopping to get the best rate.”
Some help on credit scores
Another provision of the CARES Act provides potential leniency for consumers facing borrowing and credit pressures and who are able to work out a new payment plan with their credit-card companies or other lenders.
The provision temporarily amends the Fair Credit Reporting Act with a helpful rule for consumers who receive an "accommodation" or concession from their lender. Assuming the lender agrees to a new payback plan and the consumer sticks with it, the CARES Act instructs the company to report the person's transactions as remaining satisfactory or "current."
"If you experience financial hardship due to the coronavirus outbreak, if you enter into a hardship provision with the lender, abide by the terms and make payments, then the credit card company won't provide negative information to the credit-reporting agencies," said Sara Rathner, a credit card expert at NerdWallet.
This credit-reporting provision will remain in force for 120 days after enactment of the CARES Act on March 27 or 120 days after the national coronavirus emergency is declared over, whichever occurs later.
But while an easier payment schedule with no credit damage might sound like a good deal, Rathner cautions against seeking an accommodation except as a last resort. Borrowers could face restrictions such as having their credit use frozen or seeing their accounts continue to accrue interest, even if payments have been suspended.
Before reaching out to your credit card company or other lender, take a close look at your budget to see if you can free up cash that can be applied to card payments or other debt, Rathner suggests.
If you do decide to call your lender to see what types of arrangements can be made, take notes of your conversations with customer-service representatives, she advises, and get a written acknowledgement of the terms of any new deal.
"We'll see a lot of people struggle financially (well after the health emergency abates)," Rathner said. These pressures could affect the credit scores and financial security of millions of Americans for years to come.
401(k) flexibility not a given
For many people affected by the coronavirus disruption, borrowing money from a 401(k)-style plan could be enticing. These loans have many advantages. For example, there’s no lengthy application or approval process, the interest you pay goes back into your account and there’s often flexibility in terms of repaying the money.
The new CARES Act increases the potential size of loans from 401(k)-style plans to a maximum of $100,000 from $50,000 before. But this increase isn’t automatic — employers must adopt these changes, and many companies are dragging their feet.
Of 152 employers surveyed by the Plan Sponsor Council of America in early April, 47% said they were still deciding which CARES Act provisions, if any, to implement, with smaller employers most reluctant to make changes.
“Employers are being forced to make difficult decisions between business needs and what is in the long-term best interest of their participants,” said Hattie Greenan, director of research at the Plan Sponsor Council. “They want to provide immediate relief to employees directly impacted by COVID-19 but are also thoughtfully considering the impact on their employees’ long-term financial stability and ability to retire.”
Employers so far are more receptive to letting employees tap into their accounts by making withdrawals rather than increasing loan amounts. Some 45% of employer respondents to the survey said they have or plan to adopt the CARES Act distribution provisions, compared to 32% who said they have or will embrace higher loan amounts.
The CARES Act distribution provisions allow workers to withdraw up to 100% of their vested account balance or $100,000, whichever is less, without facing a possible 10% penalty, with the option of repaying the money over three years to delay paying taxes on it. That's one provision that employers must decide whether to adopt and so is a provision allowing workers to suspend loan payments otherwise due in 2020.
About 9% of plan sponsors say they don’t plan to adopt any of the CARES Act withdrawal or loan provisions, and other companies will implement only some of them, so it’s important for workers to check details on their plans.
All this is in addition to other possible changes to 401(k) plans not addressed by the CARES Act, such as potential reductions in the amount of matching funds that employers contribute or suspension of matching funds entirely. Some employers already are cutting these benefits.
Reach Wiles at email@example.com.
Marc has 36 years in financial services and 6 years in teaching.
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