From the onset of COVID-19, homeowners are wondering if mortgage forbearance is the only option. It’s hard to know where to get the facts. With news about unemployment and the tightening market swirling, it’s best to check in with an expert.
Chase said it’s hard to get the real story on what’s going on with mortgage forbearance and relief right now, since it varies lender by lender. In order to get accurate, up-to-date information, speak to your loan originator or mortgage broker. They have a direct line to your specific lender. Since regulations and restrictions are changing daily, check their social media for updates as well.
There are a few historical events that lenders and originators are looking at to try to predict the future. Unfortunately, the current crisis is totally unprecedented. The mass nationwide layoffs and businesses closing and gradually reopening across the country has never happened to our modern market.
The Secondary Market – Beyond Your Mortgage
The secondary market is where most of the issues lie. When a lender closes a loan, they then bundle and sell them on the secondary market as mortgage-backed securities. On that secondary market, investors rate them and purchase the loans based on their credit quality (such as the borrower’s credit score). Investors are now pulling back and not buying lower-quality loans. Thus, lenders are now upping their restrictions – they have higher standards for people seeking loans.
So, markets are restricting and investors are not purchasing loans at risk of default on the secondary market. Lenders have to hold onto those loans due to that market, which ties up their liquidity and prevents new loans. That creates a domino effect.
Should I Choose Mortgage Forbearance?
In a mortgage forbearance agreement, the lender pauses payments for a set period of time. This is not the same as debt forgiveness! Depending on the agreement, the borrower has to pay the paused payments back in a lump sum or in larger payments over a period of time. Due to finances, that may not be possible for you. The borrower may make a new agreement with the lender to make double payments, which may not be realistic… then foreclosure proceedings may begin.
This makes mortgage forbearance a risky choice. Because borrowers are unsure about their future income, it may not make sense to promise to pay a lump sum or double payments in the future. Also, borrowers have to sign up for forbearance and make an official agreement – they can’t just stop making payments.
Soon, there may be options beyond forbearance. The federal government is working on a plan for loan relief, with forgiveness or deferment, payments added to the back end of the loan without interest. However, lenders haven’t had time to figure out how they will do this. Lenders still owe money to bond holders, and need to make their scheduled payments.
Currently, there is a lot of misunderstanding about this system. Since the government does not require the borrower to show proof of hardship, some people are entering mortgage forbearance agreements when they may not need to. It’s important to make sure the people who really need it are getting assistance and it doesn’t effect on the mortgage market negatively.
We know that 10 million Americans applied for mortgage forbearance. Were all those people really in such a place of hardship that they needed to do so? There’s no data to tell us that, but it may be that many simply rushed into the process in a panic when they lost their job or were furloughed.
Unfortunately, many people may have rushed this process, perhaps thinking they were getting a deferment. Loan payment relief is appealing, but you should examine the terms to avoid making the same mistake. The original messaging was not as specific as it should have been, so many are seeing the consequences of that decision.
What Can I Do Today?
Chase Hanks of Movement Mortgage recommends that borrowers take a pause and wait before signing any mortgage forbearance agreements. If you can pay your mortgage this month, pay it. Wait until the dust settles and see what other agreements the government and your lender put in place.
Warning – if you’re in a forbearance and you want cash, lenders will not allow you to refinance. So don’t rush into a forbearance agreement. Examine your ability to uphold your financial responsibility. Make a plan so you don’t lose your credit or even worse, your home. Don’t make a costly mistake.
Make sure you understand forbearance fully and really need it if you apply. Currently, if you enter into a forbearance agreement, you cannot qualify for a mortgage until you show 12 months of on-time payments for that agreement. So, forbearance is not a quick fix or a way to just put off payments – it’s a big change to your loan situation.
Home Loans Now
In WNC, it’s becoming more of a seller’s market, and people are still applying for home loans. If you have a recession-proof income and you’re safe, it’s a great time to buy. Due to restrictions, many loan programs are paused through the end of May. Jumbo loans and specialty programs like down payment assistance are paused. Lenders have higher restrictions on credit scores, but the home market is still active.
So yes, you can still get a loan in these uncertain times. Even though many people are out of work temporarily, many are still in the market for a new home.
There are lots of lenders with varying levels of liquidity depending on their portfolio, so reach out to more than one. FHA, VA, and conventional loans are still available. USDA still operates their 100% financing. Lending is highly customized, so you should shop around if your current lender doesn’t have a loan for you.
In Asheville, this may mean locals can afford homes again! Since the bids aren’t as competitive, people who have been looking for over a year can now use the growing buyers’ market to their advantage. Less folks are buying from out of town or as investment properties, so that opens up some interesting opportunities.
If you’re looking for a loan right now, be prepared and be honest. If you’re laid off or furloughed, you need to return to your position before lenders can use that income to qualify you for a loan. If you have variable income, your lender will average it with the time you didn’t have income or had less. Save time and be upfront about your situation – lenders will verify your income with your employer when you apply and at closing. Your loan originator will advise you as to the best practice in this situation. Align yourself with people who really know the industry inside and out.