Even in good markets, unexpected events or circumstances happen. People lose jobs, suffer health issues, and for a variety of reasons, are unable to make their mortgage payments. The coronavirus crisis has created a level of job loss never before seen in history. When a homeowner gets behind in their payments, they usually don’t know what to do so they do nothing. In fact, in the last recession, over 70% of homeowners who fell behind in payments did just that. They did absolutely nothing and ended up walking away from their homes. If we learned anything in the last recession, it is this: if you can’t make your mortgage payment, communicate with your mortgage lender immediately. In reality, there are several options you may have, and foreclosure is the very last one on the list.
Credit and homeownership can often be saved if the homeowner takes quick action. At the first sign of not being able to make the monthly mortgage payment, the homeowner should promptly contact a real estate attorney, a Realtor®, and their mortgage lender to review these options summarized below:
1) Repayment plan (also known as Forbearance) and covered in last week’s article
2) Sell the Property
3) Rent the Property
5) Modification of the Mortgage
6) Short Refinance
7) Reverse Mortgage
8) Deed in Lieu of Foreclosure
10) FHA and VA options
11) Service members Civil Relief Act (SCRA)
12) Short Sale
Often the reason the homeowner is behind on payments is only temporary. If this is the case, the homeowner must pay all the missed payments, late fees, and attorney fees in a lump sum payment. After the homeowner is caught up, the loan continues as it was before.
Repayment Plan or Forbearance
Sometimes the mortgage lender will add up the missed payments, late fees, and attorney fees and divide them up through a payment plan or add the payments onto the end of the loan. The homeowner will usually need to show the mortgage lender why they would now be able to handle the repayment plan suggested.
Sell the Property
Coronavirus restrictions for showing homes requiring scheduled showings and no open houses can make the home selling process longer. These restrictions are likely to be with us for some time, making quick action even more important. The sooner a distressed homeowner calls their REALTOR® the better. Each month that goes by that the homeowner does not make a payment before getting the home on the market, makes it tougher to solve the problem. The more equity an owner has in their home, the more likely they will be able to sell the property and pay off the mortgage, and maybe even have something left over. Some mortgage lenders may postpone foreclosure if they know the property is on the market or if a home sale contract is pending.
Rent the Property
The homeowner must live somewhere, but if the homeowner can move elsewhere and pay less rent than a mortgage payment, the homeowner could then rent out the old home. If this rent is for an amount that is close to the total mortgage principal, interest, taxes, and insurance payment, this could be a viable alternative. When the situation stabilizes, the homeowner could move back into their old home.
Usually when a homeowner is behind on the payments and does not have a job, it is tough to qualify for a new mortgage loan. Yet, if there is enough equity in the home, the homeowner’s credit has not been damaged too badly, and the problem that caused the late payments has gone away, then there is a chance a new mortgage lender will make a loan.
Modification of the Mortgage
A mortgage lender may agree to a variety of modifications. These modifications might include lowering the interest rate, extending the term of the loan, or adding the missed payments to the end of the loan.
A short refinance can involve a reduction of the principal amount and possibly even a lower interest rate. Usually the borrower still needs to show not only hardship, but also the ability to pay the mortgage with the new payment structure.
If the homeowner is over the age of 62, a reverse mortgage could pay off the existing mortgage and the homeowner could have no payments. If there is enough equity in the home, the homeowner might even be able to receive payments. For seniors whose retirement accounts are losing value due to the coronavirus, this could be a possible option.
Deed-in-Lieu of Foreclosure
This usually works best when the home value is about the same as the mortgage amount. It is often called the “friendly foreclosure” since the borrower simply deeds the property back to the mortgage lender. Generally, this only works if there is just one mortgage and no other liens. In the settlement, sometimes the lender will forego any rights to a deficiency judgment.
Sometimes bankruptcy will stop a foreclosure and allow the borrower to reorganize their debt and keep their property. By entering bankruptcy, it can make the property more difficult to sell or more challenging with regard to negotiating a short sale. Personal bankruptcy is generally considered a last resort.
Service members Civil Relief Act (SCRA)
When a homeowner is called to military service and can show that the call to duty affects their ability to pay their mortgage — and the mortgage was in place before active service — there can be relief.
A short sale occurs when the loan on the property is greater than the value of the property. When an offer comes in on the property, the mortgage lender must approve the amount of the shortfall. Often there are so many investors involved in making the decision on the shortfall, it can take an extraordinary amount of time to get the final approval. During the recession of 2007 to 2012, short sales were very commonplace. Nevertheless, due to increases in value since 2012, most homeowners are likely to have more equity to weather the storm.
Foreclosure finally comes about when the mortgage lender has filed the necessary paperwork and has served the Notice of Election and Demand (NED). In Colorado, a sale date is then set 110 to 125 days from the NED recording date. After the sale date, there is no redemption period, and the homeowner no longer has any rights to the property.
Quick action and contacting the appropriate professionals are the key factors in successfully dealing with a possible foreclosure situation. During the coronavirus pandemic, however, options can potentially change daily. Be sure to consult your attorney, mortgage lender, and Realtor for the most current information and to identify and work towards a solution that might work best for you.
By Duane Duggan. Duane has been a Realtor for RE/MAX of Boulder in Colorado since 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients. He has been awarded two of the highest honors bestowed by RE/MAX International: The Lifetime Achievement Award and the Circle of Legends Award. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail DuaneDuggan@boulderco.com, call 303.441.5611 or visit boulderco.com.