Many small businesses are currently struggling financially due to COVID-19 and shelter-in-place orders that have closed many for weeks or even months. Those who own their buildings or own other businesses may worry about impending foreclosure as cash flow comes to a halt.
Paying the bills, including the monthly mortgage payment if you have a commercial mortgage, can be harder than ever. With all the other economic stimulus packages we see in this pandemic, is there any relief from mortgage lenders? Are you temporarily able to suspend your home loan payments?
The good news is that many banks and lenders offer forbearance agreements. Keep reading to learn more.
What is a forbearance agreement?
Generally, if a borrower defaults on a commercial real estate loan, the lender has the right to evict the tenant and seize the property. However, with a forbearance agreement, the bank, credit union, or other mortgage lender agrees to temporarily suspend the measures.
It’s not automatic: as a borrower, you may need to prove financial hardship to avoid foreclosure on your mortgage. The lender may or may not accept a forbearance.
Does forbearance harm your credit?
This shouldn’t be the case, as long as you have a formal forbearance agreement with your lender. But keep an eye on your credit to make sure no late payments or missing payments were reported in error.
Are companies eligible for a forbearance agreement?
Although the CARES Act provides mortgage forbearance for federally guaranteed home loans, it does not specifically cover commercial real estate loans. However, we see many commercial lenders offering commercial loan forbearance agreements as an option for borrowers.
From a lender’s perspective, it’s better to suspend mortgage payments in the hope of receiving them again than to foreclose and then try to sell a property, especially given the tough economic conditions. We all hope that the cash flow problems that many businesses are suffering from will be short-lived and that we can resume those 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 trouble with little chance of recovery, the bank may decide that you may not be able to resume payment of your loan mortgage later and refuse your forbearance request. .
Commercial Mortgage Forbearance Requirements
Each lender will have their own mortgage forbearance application process, so check with your lender’s website to see the exact requirements. Do not wait until loan repayment is due before applying; naturally, lenders are inundated with inquiries right now, and it can take weeks for a response. You don’t want to risk your credit ratings being negatively affected due to a late mortgage payment. (Check your free business credit scores now for a baseline.)
Typically, you’ll want 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 Act and Commercial Lending Forbearance
Although there is no specific program or policy requiring banks to offer commercial loan forbearance with the CARES Act due to financial hardship, the Federal Reserve, FDIC, and other federal regulatory agencies and States encourage financial institutions to work with borrowers to avoid foreclosure.
Apart from mortgage forbearance, many banks offer other types of relief such as waiver of late fees and payment deferral.
Challenges Facing Commercial Mortgage Lenders Amid the COVID-19 Pandemic
Companies are not the only ones to suffer from this situation. Mortgage lenders, too, are running out of capital due to these 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 out 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 assistance. Next, put several financial and loan documents in order. Read your loan agreement to see if it mentions how to make a forbearance request. 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 deferment period. You may need to provide financial projections for next year, although this is understandably difficult given the circumstances. You may be asked for 2019 year-end and current year financial statements and rental records, as well as financial statements for any owner occupiers.
If you have a relationship with a specific banker, this may be your best bet, as calling the 800 number may take some time as you are one of many trying to set up a forbearance plan.
Once you can talk to someone, ask what kind of forbearance or loan modification options you have. Will you be charged late fees or interest while you suspend payments? What is the procedure if you have to extend the abstention? Make sure you understand your options, then read the mortgage forbearance agreement carefully, if you are 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 Last Word: Forbearance Agreements
If there’s one good thing about the situation you find yourself in these days, it’s that you’re far from alone. Lenders expect borrowers to request forbearance waiver, and most have procedures in place to streamline requesting loan deferrals.
Even if your business isn’t able to fire on all cylinders and you get a temporary reprieve on your mortgage payments, get a plan outlining how and when you’ll be able to make those payments again. Some of the CARES Act SBA loans might help. Get more information on the Paycheck Protection Program and more information on EIDL as financial tools that can help you in the meantime.
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