If you know of anyone who is facing a mortgage crunch due to COVID-19, time is of the essence. The sooner they take definitive action to address their situation, the more likely they will be to successfully navigate through this difficult time.
Failure to act quickly can have dire consequences including:
- Loss of any equity the owner may have in the property.
- A substantial drop in their credit score resulting in higher fees and interest rates on any credit they do obtain.
- Higher costs and less availability of other products, the most notable of which is auto insurance.
Get the word out — help is available!
When homeowners are facing a possible foreclosure, they seldom know what to do. Use your social media accounts, your print campaigns, digital marketing and any other means to let people know there is help available for those currently struggling to make their mortgage payments.
The script below is just as effective today as it was during the last two downturns. Use it in print, online or by phone:
Do you know someone who is struggling to make their mortgage payment due to COVID-19? If so, there are resources available to help them avoid foreclosure and keep their home. Please contact me at (give your contact information) if you know someone who needs help now.
Foreclosure avoidance strategies from the Great Recession
Anyone who was selling real estate during the Great Recession remembers all the foreclosures, short sales and bankruptcies that occurred. Nevertheless, here are some options that other distressed homeowners used to weather previous downturns.
- Reduce costs by doubling up with other family members who may be currently renting.
- For those who have a spare bedroom and bath, consider finding a roommate.
- Rent out their current home and move into a rental. In many cases, the rent covers a substantial proportion of the owner’s carrying costs.
- If the person owns two properties and is living in the one that has higher carrying costs, rent the more expensive property, and move into the property with the lower carrying costs.
Lenders can provide a wide variety of options to those facing a mortgage crunch, but getting that help can be challenging. What’s unusual about today’s situation is that many lenders have voluntarily agreed to help distressed homeowners find a workable solution.
When a homeowner contacts a lender, it’s usually smart to bypass the customer service department and ask for loan workout department instead.
Forbearance is designed to help homeowners with hardships such as losing their job, health care costs or damage from natural disasters. The lender allows the homeowner to temporarily stop paying their mortgage or allows them to pay back the mortgage with a lower payment. The homeowner will have to repay any missed or reduced payments. Some types of forbearance are listed below:
1. Pause with a balloon payment
Avoid any option that allows delayed payments for a period of time but requires a balloon payment at the end for the full amount.
2. Mortgage payment reduction option
Assume the homeowner has a $1,000 monthly mortgage payment, and the lender agrees to reduce the payment to $500 for three months.
Starting in the fourth month, the homeowner would increase their payments to $1,125 for the next 12 months to payback the $1,500 they didn’t pay. ($1,000 + $1500/12 = $1,125 per month for the next 12 months).
3. Paused payment option paid back at the end of the mortgage
For someone who may be temporarily unemployed due to COVID-19, this can be an excellent option. Homeowners can request to pause their payments for six months.
They can repay that amount by either adding it to the end of their mortgage or by taking out a separate loan to cover it. Interest continues to accrue on the missed payments.
4. Loan extension or permanent interest rate reduction
Homeowners may be able to extend the time it takes to pay off their loan or obtain a change in their interest rate. While this may sound attractive, they will have even more requirements and hurdles to jump than obtaining a refinance or a new loan. This process typically takes much longer to close as well.
5. Step rate loan modification
The interest rate is adjusted instead of the term length to make the monthly payments more affordable. A step rate drops the interest rate by up to 3 percent for the first year and then increases 1 percent per year until it returns to the original interest rate. This program provides temporary relief and is very popular with lenders.
How to locate a forbearance program
Hope Now, which is a part of the Consumer Financial Protection Bureau (CFPB), is a nonprofit dedicated to home preservation. Formed in 2007 by the U.S. Department of the Treasury and the U.S. Department of Housing and Urban Development (HUD), the alliance brought together diverse stakeholders to address housing challenges in local markets and to create collaborations to solve problems.
During the Great Recession, the Hope Now alliance was a tremendous resource for distressed property owners. Today, it’s helping distressed homeowners reach their mortgage servicers about beginning the forbearance process. Here are the steps to take:
- Visit the nonprofit’s website, and click on COVID-19 tab.
- A drop-down menu will appear. Locate the company that services their mortgage.
- Click on the name of the lender/service provider.
- Complete the online application to begin the forbearance process.
- For any homeowner seeking forbearance or any other type of loan modification, keep in mind that any error in the submission package will result in a denial.
- The lender may also charge fees for this service including a drive-by appraisal, title, escrow and recording fees. Borrowers may be able to roll these fees into existing loan balance.
To obtain an objective assessment about the lender’s solution to the homeowner’s situation, visit the CFPB’s “Find a Counselor” tool to obtain a list of counseling agencies approved by the HUD.
Any time a homeowner is considering changing the terms of their mortgage, the possible tax ramifications should be evaluated by their tax professional.
Second, before signing your final loan documents, always obtain an agreement in writing about how this change will be reported on their credit report. If the lender reports their credit status incorrectly, the homeowner can give the credit bureau a copy of the letter. The homeowner also should contact the lender to advise them they have made a reporting error on their credit report.
Please take every possible step you can to help struggling homeowners obtain the help they need to work through their mortgage issues and keep their homes.
Be sure to check out this week’s video where we do a deeper dive into these topics as well as discuss short sales, bankruptcy and other things desperate homeowners may try when they face a mortgage crunch. (In addition to having mortgage issues, homeowners may be struggling with credit issues as well.)
Bernice Ross, President and CEO of BrokerageUP and RealEstateCoach.com, is a national speaker, author and trainer with over 1,000 published articles. Learn about her broker/manager training programs designed for women, by women, at BrokerageUp.com and her new agent sales training at RealEstateCoach.com/newagent.
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