The coronavirus has led to an unprecedented spike in unemployment in across the nation. During the Great Recession from 2008 to 2012, the highest number of people without jobs reached 15.3 million. Now, over 26 million workers have filed jobless claims in a five-week period, according the U.S. Department of Labor. Combine that with the 7.1 million people who were unemployed prior to coronavirus, and this equals over 33 million unemployed workers for an unemployment rate of over 20%. This is the highest level of unemployment since 1934.
As a result of these recent job losses, unemployed homeowners are suddenly unable to make their mortgage payments. During the Great Recession in 2008 to 2012, many homeowners buried their heads in the sand, which led to a high volume of mortgage delinquencies, defaults, and foreclosures. That’s the worst thing you can do. If you have just lost your job because of coronavirus, the first step you should take is to immediately contact your mortgage lender and make them aware of the situation. If you neglect this issue and stop making your payments, your mortgage lender will likely start the process of foreclosure soon. Do not simply stop making payments because you think the national news, which has been widely reporting on mortgage relief, said it was okay.
During the 2008 to 2012 recession, the terms “short sale” and “forbearance” were commonplace terms. A short sale happens when the value of a home at time of sale is less than the balance due on the mortgage. Forbearance has suddenly come into play as people have been losing their jobs and the CARES Act was signed into law on March 27, 2020. However, the CARES Act only applies to mortgages that are federally owned or backed. Forbearance isn’t as clear cut as a short sale. It can mean many things. A mortgage forbearance could be a full moratorium or suspension of payments, or a reduced interest rate and/or reduced payment. It could also mean the accumulation of past due payments into one big balloon payment. In some cases, in might mean adding interest and principal payment to the back end of the loan.
Skipping mortgage payments may sound like a “free lunch,” but nothing could be further from the truth.
There are a variety of mortgage loan types in place. However, regardless of loan type, the first step is contacting your mortgage lender. The loan type will dictate the different options for forbearance that might be available. When you contact your lender, you should know in advance which options could considered, and what the advantages and disadvantages might be.
Forbearance essentially means “holding back” foreclosure. The first option is to do everything you can to keep paying your mortgage. If that isn’t possible, and the lender says it won’t affect your credit by accepting a forbearance, be sure to ask your lender to make that promise in writing.
Deferring payments might create a balloon payment at the end of a certain term. If you have lost your job and defer six months of payments, the lender may want repayment all at once at the end of the six months. What are the odds you could make up six months of payments altogether?
Using the example above in which you don’t make payments for six months, suppose the lender offers to spread the six-month payment shortfall out over the next six months. Again, what are the odds of being able to make the resulting huge increase of payments?
The lender might offer to add the deferred amount of principal and interest payment to the back end of the loan. Over time you pay more interest, but it removes the need to deal with a balloon payment or a sudden increase in monthly payments.
The lender might offer a modification of the loan. A loan modification could result in re-doing the entire loan, including its length and interest rate. Lengthening the loan and lowering the interest rate could make the payments more affordable for the long run. It would avoid the need for the challenge of meeting balloon payments and/or increased monthly payments.
Understanding all of the options available to you will help you make your decision relative to taking a forbearance. Using forbearance for mortgage relief is serious business and can be a difficult decision. Be sure to consult your mortgage lending professional and attorney for advice on choosing the option that will work best for you.
By Duane Duggan. Duane has been a Realtor for RE/MAX of Boulder since 1982. 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.