COVID-19 caused a crisis in more ways than one. MarketWatch recently reported over 4.1 million homeowners are now in forbearance plans. Homeowners from all walks of life are either currently struggling or anticipating a struggle.
We spoke with Barry Rothman, a HUD-certified housing counselor and foreclosure prevention specialist at Consolidated Credit, to find out how COVID has changed the housing market and what that means for homeowners.
Barnaby Robles, a mortgage consultant at Wells Fargo, also spoke with us about what homeowners should know during this time.
This guide is organized by your needs. In the table of contents below, click the description that fits you best to get the info most applicable to your housing situation.
Which type of homeowner are you?
Can I use forbearance to skip payments?
Homeowners struggling because of COVID-19 have options for relief after the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed. Those with federally-owned and federally-backed mortgages from the FHA, VA, USDA, and Fannie Mae and Freddie Mac can request forbearance for up to 180 days. You can also request an extension for up to another 180 days.
Forbearance isn’t always the best option. “It is important to note,” says Rothman, “that a forbearance doesn’t mean a borrower’s payments are forgiven or erased. They are still required to repay any missed or reduced payments in the future.”
Though this is an option that can help if you’re really struggling, do your best to make it work with your budget. “Continue to make regular, timely payments on all of your accounts if possible,” recommends Robles, “and don’t necessarily jump into forbearance.”
What if I’m facing foreclosure?
Though the CARES Act prohibited lenders and loan services from foreclosing on a borrower for 60 days after March 18, 2020, that time has passed. Homeowners who find themselves experiencing a financial hardship should first reach out to their loan servicer to determine if they have any programs that could help them.
They can also seek the help of an experienced HUD-certified housing counselor who can help them sort through possible remedies and steps they can take to improve their situation. Foreclosure prevention may be possible.
Many homeowners that need cash fast due to a loss of income during the pandemic have turned to the equity in their home. You may be considering a second mortgage to help cover your needs.
There are two kinds of second mortgages: a home equity line of credit (HELOC) and a home equity loan. A HELOC is a revolving line of credit, like a credit card. It has a variable interest rate. A home equity loan is a loan you receive in a lump sum. It has a fixed interest rate.
Is a HELOC or home equity loan a good idea right now?
“While a second loan of either type can provide much needed cash, it is important to consider the longer term effect on household finances,” Rothman says. A HELOC or home equity loan can be risky, and may even threaten your homeownership.
If you decide to take out a second mortgage, make sure you work with a licensed mortgage professional. Bear in mind that many banks and lenders have stopped offering these types of loans at all out of fears over a recession.
“As customers have taken forbearance on first-lien mortgages it has obviously increased the risk on second liens,” explains Robles, “so many lenders, such as Chase and Wells Fargo have completely suspended these products.”
So, you may have a difficult time finding a reputable lender who is willing to work with you in our current economic landscape.
Ask for references and do research to make sure you are dealing with a reputable individual and organization. “Always remember,” Rothman adds, “if it sounds too good to be true, it probably is.”
Also, be aware than you may not be able to borrow as much as you traditionally could with these types of projects. Lending requirements may also be restricted.
“For those lenders that continue to do home equity loans and lines of credit,” says Robles “they have increased their loan-to-value and debt-to-income restrictions.”
Which one should I pick?
“Deciding which one is right for a borrower depends on home much money is needed, how long it is needed for and then a comparison of related costs for each,” says Rothman. With either one, you could end up borrowing too much and be underwater if property values decline.
Want to refinance
Since rates are at historic lows, it makes sense that you may be thinking about refinancing your home. But the market is changing fast.
“Generally speaking,” says Rothman, “if a homeowner’s current interest rate is 1% higher than the average interest rates on the market, they should consider refinancing. However, they need to carefully examine the attendant costs such as an appraisal, credit check, origination fees and closing costs and determine how long it will take to recoup those costs versus how long they plan to stay in that home.”
According to Equifax, doing your research is key. “As a result of these large financial trends over the past few weeks,” Equifax’s article about COVID-19 refinancing states, “some mortgage rates have increased slightly while others have lowered. The best advice for you is to ignore the headlines, do your homework, and assess if now is the right time for you to refinance.”
Preparing for the future
Should I be concerned about another housing crash?
Especially if you’re planning to borrow against your home, be prepared for the possibility of another housing crash and upside-down home values. We could be heading toward another recession and no one can say for certain what will happen with the housing market.
“It should be noted that home values have risen substantially since the Great Recession, actually surpassing highs hit in the mid-2000s before the market crashed,” says Rothman. “As such, any homeowner who might need to sell their property before a recovery takes place would be obligated to repay that money out of their own pocket.”
As this goes on, continue to make payments on your home as best as you can. Act like there is a recession right around the corner – because there just might be.
If you have questions about your home equity or how to prevent foreclosure, talk to a HUD-certified housing counselor. Call 1-800-435-2261 or complete the form to request a consultation.