Neuswanger: Dealing with your mortgage if you are impacted by COVID-19
The Mountain Mortgage Guy
As our community and nation deals with the historic consequences of the COVID-19 virus, thousands of local employees and business owners are reeling from the shutdown of local businesses and loss of income.
Sadly, many more will likely become ill and have to stay home even if they could be working. Families that comfortably made a living for years may see their income go to near zero, and let’s face it, in this valley the amount of aid being proposed likely won’t cover even a portion of a family’s monthly overhead.
One of the lessons that mortgage lenders learned from the last economic collapse in 2008 is that when businesses close and unemployment spikes, the mortgage default follows the same trajectory as unemployment. Then, it took about two years to get a system in place to deal with how to keep people in their homes through mortgage payment forbearance and the modification of loans to a lower payment.
Unfortunately, the previous time we faced this the process was awkward, lengthy and often times a jumbled mess that many homeowners simply could not navigate. This resulted in tens of thousands of foreclosures that could have been prevented.
While no system is perfect when dealing with the sheer number of loans that might be impacted, the regulatory framework for mortgage loan modification is still in place, and the industry has (hopefully) learned from its mistakes and is dusting off copies of the guidelines and making massive preparations to deal with what will likely be a flood of mortgage modification requests.
If you are suddenly out of work or have seen your business income decline drastically and fear you may not be able to pay your mortgage payment, make dealing with your mortgage a very high priority. Swallow your pride, face reality and don’t bet the house on winning the lotto. Call your lender’s customer service number, tell them your situation and ask what the procedure is to ask for a forbearance on your mortgage loan payments or a loan modification. You need to do this now, not when you are 29 days late because there will be a line of people doing the same thing.
The difference between a forbearance and a modification is that forbearance is a period to catch your breath and hopefully find new work or get your business back on track. During this time your payments will be suspended and added onto the back end of you loan. If you had a 360-month loan and you get a three-month break, there will be three months added onto your loan on the other end and you will have a 363-month term. Most loans are now eligible for up to a 12-month forbearance period.
You do not have to send in a mountain of paperwork or fill out a stack of forms to get a forbearance. Simply make the call and it should be a low drama, no-hassle process.
A modification is different, although it may and generally does include a forbearance period to start with. The forbearance period is generally used while a loan modification plan is worked out.
A modification plan can take several forms. Typically the borrower can get a much lower rate for a period of maybe five years and, in some cases, the term of the loan can be stretched out a few years to fit a lower income. However, one does have to have some form of income to get a modification, but possibly during the 90 to 360 days that can be worked out by finding a new job for a salaried borrower. It can also give a self-employed borrower time to recover, and in that case, there is some leeway on projecting what is a reasonable income as the business recovers.
The prize for being proactive in requesting a forbearance or modification is that your credit report and score will not get trashed, the lender will just cease reporting your late payments if you call before and attempt to work something out.
Once you go 30 days late, though, the late payments are there, and that likely will make your situation even worse as credit card companies will start to lower your credit limits and refuse to renew your credit cards. Then the dominos start falling.
Unfortunately, not everyone is going to be able to qualify. If you have no job or income prospects, then you may not get much more than up to a 12-month forbearance. If that is the case then maybe it is time to sell your home and rent until you get back on your feet. Asking and getting a forbearance will give you time to do that and not trash your credit with a foreclosure and a string of late payments.
Typically a mortgage lender will file a notice of intent to foreclose once you are 90 days late and initiate a full foreclosure once you are 120 days late. The process takes another three to four months before you have lost the house completely.
Even if you are able to save the house by catching up on the payments or working out a loan modification before the foreclosure sale you will get about $10,000 in attorney fees tacked on to your loan balance, or worse you may have to pay them in cash to stop the foreclosure.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage-related inquiries from local readers.
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