About 1.6 million homeowners who sought Covid-19 relief through the government’s mortgage forbearance program will soon exit, with 850,000 exiting in the first wave now through October. That means many homeowners will have to decide whether they want to keep making mortgage payments, modify their loan or cash out in a hot housing market by selling their home.
This could also provide a small boost to housing inventory for home shoppers who’ve struggled to buy a house due to competitive pricing and low inventory.
We spoke to several experts about the options available to homeowners in forbearance, and how the mass exists might impact the housing supply.
Homeowners In Forbearance Topple 1 Million
There are an estimated 1.6 million homeowners currently in various phases of forbearance, and that number continues to fall as more people exit forbearance.
After the initial set of forbearances expired on July 31, the number of loans in forbearance fell to 3.26% for the week ending on August 8 compared to 3.40% in the prior week, according to data from the Mortgage Bankers Association (MBA).
“The largest decrease in a month in the share of loans in forbearance came from a jump in forbearance exits, as many homeowners are nearing the end of their forbearance terms. The forbearance share declined for all investor and servicer categories,” said Mike Fratantoni, senior vice president and chief economist at MBA, in a press release.
Being in forbearance means that you can’t currently afford your mortgage payment, which is never a good position to be in. However, there are several options for folks exiting forbearance, and it’s important to consider each one.
New Rule Helps Struggling Borrowers Avoid Foreclosure
Preventing foreclosure is the most important goal when exiting forbearance. Whether you choose to modify your loan, go with a payment option for the months you missed or sell your home, all of these are better options than losing your home in foreclosure.
Foreclosure is emotionally and financially damaging. According to Experian, homeowners can see as much as a 100-point reduction or more to their credit score after foreclosure. This kind of blow can affect your ability to rent, buy, apply for new credit and even get a job.
To help homeowners avoid foreclosure, the Consumer Financial Protection Bureau issued a rule in place that will require lenders to follow three steps before starting a foreclosure, which include:
- The loan servicer must review a loss mitigation application submitted by the borrower that shows the borrower’s financial and household information, which can help the lender determine next steps.
- Loan servicers must follow state and local laws to verify that the home has been abandoned before proceeding with a foreclosure.
- Loan servicers must make a diligent effort to contact the homeowner before going forward with the foreclosure. Foreclosure is allowable in the event homeowners are a minimum of four months behind on their mortgage, and have been unreachable for more than 90 days.
The CFPB’s new rule goes into effect from August 31 through January 1, 2022. As long as the loan servicer adheres to these rules, they can file a foreclosure if necessary.
Payment Options After Forbearance Ends
Once your forbearance ends, you’ll have to make arrangements to repay what you owe (all of the missed payments during forbearance). The options for repayment vary by the loan type, as shown below. Although you can pay what you owe in one lump sum, none of the loans require a lump sum payment once forbearance ends.
Fannie Mae and Freddie Mac Loans
- Repayment plan. This allows you to repay your missed payments over time through higher monthly mortgage payments.
- Payment deferral. Resume your regular monthly mortgage payments and put the missed payments either at the end of the loan, or when you refinance or sell your home.
- Loan modification. If your income has a long-term or permanent reduction, you may be eligible for a modification that changes the length, interest rate, principal amount or a combination of all to make the mortgage payments affordable.
FHA/HUD Loans
- Covid-19 recovery standalone partial claim. If you can begin making your regular mortgage payments after forbearance ends, this option allows you to put the money you owe into a subordinate, no-interest lien that comes payable if you refinance your mortgage or sell your home.
- Covid-19 recovery modification. For homeowners who can’t afford the regular monthly payments after forbearance, they can extend their mortgage term to 360 months, which will reduce the monthly principal and interest payments.
- Loan modification. Borrowers can negotiate up to 25% off their mortgage payments.
USDA Loans
- Payment plan or extension. Borrowers who can resume regular mortgage payments can get an affordable payment plan or can get the missed payments deferred to the end of the loan, which would extend the term of your mortgage.
- Loan modification. Borrowers can negotiate up to 25% off their mortgage payments.
VA Loans
- Deferment. After forbearance, borrowers can defer what they owe to the end of the loan without owing additional interest. To reduce the lump-sum payment at the end, borrowers can pay off the amount over time. Another option is to get a personal loan to cover the amount due.
- Modification. For borrowers who can’t afford their regular mortgage payments, the lender may explore loan modification options to make the loan more affordable.
- Loan modification. Borrowers can negotiate up to 25% off their mortgage payments.
Related: Compare Current Mortgage Rates
Should I Sell My House Instead?
There are several reasons why homeowners might want to sell when they exit forbearance. If their income takes a permanent hit and it’s difficult making monthly mortgage payments, selling the home could be a good way to reduce costs.
Additionally, if your home is in a high-tax area or you pay hefty homeowners association fees, moving to a more affordable neighborhood is another way of saving money.
And this is an ideal time to be a seller.
Home equity is soaring, which is particularly helpful for homeowners in forbearance considering selling at a higher price than purchased. According to CoreLogic, the median home equity is around $100,000 and the median loan-to-value (LTV) ratio is at about 61%. In other words, most people won’t have trouble turning a profit if they choose to sell their homes.
Big equity gains were fueled by intense buyer demand this past year, which has driven up home prices across the country. Even people in forbearance who haven’t paid their monthly mortgage bill still have significant equity in their homes.
Borrowers with Federal Housing Administration (FHA) loans have about $68,000 in equity while borrowers with loans backed by Fannie Mae or Freddie Mac have approximately $125,000 in equity.
Forbes.com article, “Here’s What Will Happen When The Mortgage Forbearance Lifts“