What Will Save Homeowners From Foreclosure
Foreclosure Fears: What Homeowners Should Know About Today's Forbearance Programs
2020 has been a tough year for everyone, and the recent pandemic's economic downturn has affected many families across the country. With the loss of jobs, and businesses closing, some families are beginning to wonder how they might make their monthly mortgage payments.
The fear of foreclosure is a heavy burden to bear, and the housing crash of 2008 has left many people fearing another onslaught of foreclosures from the current economic situation. However, today there is an option that wasn't available to homeowners back in the 2008 housing crash. The option of forbearance. Forbearance options along with a healthy housing market, can make every difference in considering what to do when homeowners can no longer make their mortgage.
What Makes 2020 Different from 2008?
Many factors led to the mass foreclosures of 2008. One of those factors was homeowner equity. In 2008, many homeowners were underwater with their mortgages, owing more to the banks than their home was worth. There were no options to sell because homeowners would have to use their funds to cover attorneys' costs, real estate commission, and closing costs. The market was fastly depreciating, and so many homeowners were forced to go to strategic defaults on their homes, leading to foreclosure.
Today's market is vastly different than it was in 2008. For starters, homeowners have more equity in their homes. Higher equity, paired with how today's housing market has a shortage of listings available, means that selling is a valid option for homeowners who cannot make their mortgage payments. Another critical difference available today to homeowners is forbearance on their mortgages. Forbearance can help homeowners modify their mortgage payments during an economic crisis so that they can stay in their homes and still find a way to pay off their mortgage.
What is Forbearance?
When referring to the mortgage process, the definition of forbearance is an arrangement or agreement between the borrower and the lender to postpone or delay a foreclosure. The literal meaning of forbearance is "holding back". When mortgage borrowers are unable to meet their repayment terms, lenders may opt to foreclose. Be sure to ask your lender which program is best for you because eligibility requirements will differ for each lender.
The good news is many homeowners qualify for forbearance on their mortgages. There are four main types of forbearance:
1. Refinance Repay: This option capitalizes the forbearance amount. It is a good option for homeowners who have strong credit, have adequate equity in their homes, maybe had a
higher interest rate on their original loan, and are employed with no significant wage loss and a steady income.
2. Repayment Plan: This plan allows you to spread out your past due amount owed over several months in order to bring you current on your mortgage. This plan is good for homeowners who are ineligible or do not want to refinance.
3. Deferral Program: This program allows the homeowner to move payments to the end of the loan term but keeps the monthly principal and interest payments the same. This is a good option for homeowners who temporarily lost their income, and subsequently regained most or all of that income.
4. Modification: This type of forbearance is for homeowners that lost 20% to 30% of their income, but not all of their income, and want to stay in their home. It allows the homeowner to modify the original terms of the loan—such as interest rate, length of the loan and the payment amount.
What Happens When You Don't Qualify for Forbearance?
If a homeowner does not qualify for any of the listed forbearance programs, they can either sell or let their house go to foreclosure. These options may seem scary, but today's housing market favors the seller, and homeowners have a record amount of equity, meaning that foreclosure still wouldn't be the first option.
"In total, an estimated 172K loans are in forbearance, have missed three or more payments under their plans and have less than 10% equity in their homes."
According to Black Knight, only the smallest amount of forbearance loans may lead to a foreclosure. Today's sellers have the market on their side. Most homeowners have equity to help them when they cannot pay their mortgages. They have forbearance systems that work to help homeowners get back on their feet. Even without qualifying for forbearance, the option to sell is more viable than ever, so the crisis of 2008 can stay safely in the past.
What Happens When Forbearance Ends?
Forbearance isn’t the same thing as loan forgiveness, so once the forbearance period ends, homeowners will be expected to pay their mortgage on time along with the payments they missed during the forbearance period. This may sound overwhelming, but there are still many options available to homeowners for how to exit a forbearance period. The right option will depend on employment status, current finances, and the homeowner’s ability to resume paying their mortgage.
1. Full Repayment: This is a one time lump sum payment. Lenders are not allowed to require this form of repayment, but it is possible to pay back the missed payments all at once.
2. Intermittent Payments: This option allows homeowners to arrange repayment with their servicer over the span of three, six, nine, or twelve months on top of regular payments. 3. Lengthen Loan Term: Through lengthening the loan term, homeowners can add the repayment at the end of an extended loan term through additional mortgage payments. 4. Defer Repayment: Homeowners can use this option to repay the amount owed at the time the house is sold, refinanced, or the mortgage term ends.
5. Loan Modification: This is a good option for homeowners who are at risk of default. Changing the mortgage terms can include a lower interest rate, reduced length of loan, or reduced monthly payments to help the homeowner smoothly exit their forbearance period.
If you need help finding out if you are eligible for forbearance or if you need expert advice on how to get help with your particular situation, please do not hesitate to reach out to me. I have a vast list of resources available to help guide you through the process.