Struggling to pay your mortgage during Covid-19?
You are not alone. We are real estate experts in Tampa Bay that have been through everything from bubble to bust and we are here to explain some of your options to you.
If you are still employed in Tampa Bay, or have savings and can pay your mortgage, pay your mortgage. The programs that exist are not freebies by any stretch of the imagination, nor are they payment holidays without consequences.
Don’t call your mortgage servicer if you aren’t facing an immediate issue. Mortgage servicers are getting a lot of calls and need to first help those who won’t be able to pay their mortgage. Check their website first for possible options.
If you can’t pay your mortgage due to unemployment, or can only pay a portion, contact your mortgage servicer immediately.
It may take a while to get a loan servicer on the phone. Loan servicers are experiencing a high call volume and may also be impacted by the pandemic. Please be sure to read this blog carefully so you are prepared for this conversation.
Let’s understand how mortgages work first. You buy a home. The lender you closed with may have sold your loan to another investor or it may be owned by Fannie Mae or Freddie Mac – about 41% of mortgages are. The servicer of the mortgage is the party to which you send your payment every month but they may not necessarily own your loan. You’ll reach out your service for options unless your loan is owned by Fannie Mae or Freddie Mac, who have options available on their website including forbearance, late fee relief or a new repayment plan or loan modification.
If you don’t have a federally backed mortgage, you still may have relief options through your mortgage servicer or from your state. Fannie Mae and Freddie Mac have loan lookup tools on their website:
Some of the options you have when facing a financial difficulty paying your mortgage include:
- Mortgage Forbearance
- Repayment Plan/Loan Modification
- Deed-in-Lieu of Foreclosure
- Selling your home (Equity in Home)
- Short Selling your home (No Equity in Home)
There are a lot of misconceptions about how Mortgage Forbearance works. Here’s an example:
Let’s do some ‘mortgage forbearance math’.
Mom and Dad have a mortgage.
It’s currently $1,500 per month.
Dad gets laid off, calls the servicer, and asks for forbearance.
In one phone call, he gets 6 months “off” from paying.
Seven months later, Dad is finally back to work, and hasn’t been able to save any money during the forbearance.
Forbearance is lifted and servicer says,
“That will be $9,000 + $1,500, which is now due”. ($10,500)
Dad almost passes out and says, “WHY??”
Servicer: “That’s the 6 months of forbearance plus the current month.”
Dad: “I can’t do that, can we work something out?”
Servicer: “Sure, we will spread out the $9,000 over 12 months.”
Dad: “Phew….ok, good. What will that look like?”
Servicer: That will be $2250 a month for the next 12 months.”
Dad: ” OMG!!! I can’t afford that.”
Servicer: “Sorry…..”
Dad: “Can I refinance?”
Servicer: “No because the loan went into forbearance.”
Dad: “What can I do?”
In a nutshell, this is forbearance, folks. Forbearance is not forgiveness. Every lender is doing this differently, so this may not apply in all circumstances, but this is the standard way forbearance works, payments are due at the end of the forbearance period. It is critical to ask and get it in writing if your lender offers to put the payments at the end of the loan (ideal) versus having them be immediately due as a lump sum once the forbearance period is over (not ideal, for most people).
A new federal law, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, puts in place two protections for homeowners with federally backed mortgages:
- A foreclosure moratorium: The CARES Act further provides that, except for vacant or abandoned property, a Federally backed mortgage loan servicer is prohibited from initiating any foreclosure process, seeking a foreclosure judgment or order of sale, or executing a foreclosure-related eviction or foreclosure sale for at least a 60-day period that began on March 18, 2020, and ending May 16th.
- A right to forbearance for homeowners who are experiencing a financial hardship due to the COVID-19 emergency. Remember, forbearance is not forgiveness and it’s important to know the terms of how your servicer handles missed payments.
Now, what happens beyond that 60 day period, if you still can’t pay your mortgage? The way we are reading it – if you have not taken a repayment plan or forbearance option, after 60 days the lender could legally start the foreclosure process.
If you are seriously behind on your mortgage and you cannot make up forbearance missed payments, you may want to consider selling your home if you have equity. If you have equity, you are in the best position to sell your home, pocket some cash, and perhaps rent for awhile.
Another option if you do not have equity in your Tampa area home is short selling, more on this below. Yet another option may include a deed-in-lieu of foreclosure (not my favorite option) which is basically signing your home back over to the bank. What many people do not seem to understand is that letting a home foreclose or signing a deed-in-lieu of foreclosure with your lender does not necessarily release you from liability of paying off the mortgage just because you “gave it back to the bank”. In many cases, people who’ve been foreclosed upon, four years later, are surprised to get a letter from the bank stating that they owe a $100K deficiency judgment – the difference between what they owed and what the property sold for as a foreclosure. Yikes!!!
Now, that said, even in a short sale scenario the bank may not, in every case, release the Seller from the deficiency owed. WHAT?! Why bother with a short sale then, you may be wondering. This is why its imperative to have a Realtor who is experienced in short sales who can make sure the correct language is in the approval letter to get your deficiency released. We always recommend that our clients to consult with a real estate attorney as sometimes the Realtor and attorney can work in tandem, and the attorney can get that deficiency forgiven forever. Also often certain banks will not pursue for a deficiency if the homeowner tried to do a short sale versus allowing a home to be foreclosed on or “strategically defaulting”. The bank ALWAYS prefers the homeowner try to short sale as it saves them thousands in processing and attorneys fees if they don’t have to foreclose.
Here are the reasons why it may be in your best interest to pursue a short sale:
1. Deficiency. It is easier to get a release of deficiency judgement using a short sale than if you use a deed-in-lieu or just allow the lender to foreclose.
2. You can buy a new home again sooner if you Short Sale, but Foreclosure follows you. If you let a home foreclose, you may not be able to purchase another primary or investment residence again for a very long time, depending on who owned your mortgage and who you are trying to finance through in the future. However, if you do a short sale, the banks look more favorably on this and you will be eligible to purchase a new primary residence with a Fannie Mae or non-Fannie Mae loan in only 2 years and interest rates should not be affected for you as your credit improves post-short sale. Homeowners will always have to disclose that they have had a foreclosure on any mortgage application and many job applications they may complete in the future. This can also have an adverse affect on their future mortgage rates. Foreclosure is an item that is asked about specifically in credit inquiries. There is no seven-year time limit on this credit item.
3. Your credit score. If you let a home foreclose, your credit score will be hit 250-300 points and will likely not recover for at least 3 years or more. With a short sale scenario, the affect of the credit score is much less significant and after the fact the debt shows as “settled for amount less than owed” on the credit report and should roll off of one’s credit report in 12 to 18 months. It looks the same as someone who’s settled a credit card balance. I had a client who had immaculate credit and she did not want to ruin her credit rating. We attempted to do the short sale while she continued to make payments on the loan. The short sale was nearly approved when the bank (who happened to be Chase) came back and said, everything looks great – but its not a hardship because she’s still paying the mortgage! (Little did they know she was down to $300 in her bank account by that point!) As a Realtor I can never legally advise a client to stop paying the mortgage, but upon hearing this and given the situation, she finally decided to go 30 days late and Chase approved the sale. Her credit likely took a small hit because of the one 30 day late but nothing compared to what a foreclosure would have done to her rating.
4. Credit History. When you are foreclosed, it will remain on a person’s public record in credit history for up to 10 years. With a short sale there is no reporting category for this, and it will state “paid, settled for amount less than owed” and should roll off in 7 years or less.
5. Security Clearance. Foreclosure is the most challenging issue against a security clearance outside of a conviction of a serious misdemeanor or felony. If a client has a foreclosure and is a police officer, in the military, in the CIA or any other position that requires a security clearance, the clearance will be revoked and the position will be terminated. However, a short sale on its own does not challenge most security clearances.
6. Negative in Employment Credit Checks – Many employers run credit checks on prospective employees. Foreclosure is one of the top items that will put a potential new hire in jeopardy. If the employer feels you can’t manage your personal finances, they may feel that you can’t manage things at their company, either.
7. Potentially Damaging in Current Employment – Many current employers run credit checks. A foreclosure can put a current position in jeopardy. Same reason as above.
8. Lower Tax Liability than Foreclosure – The tax liability in a foreclosure may be much higher than in a properly negotiated short sale since canceled debt will be higher in a foreclosure.
9. You Have Alternatives – As your expert, I will explore every option with you and work toward the best resolution. Some lenders are offering financial incentives right now. I had one homeowner who was offered $5,000 at closing if she got her short sale closed within 30 days. Another one was offered $20,000 to complete a short sale. These incentives vary from lender to lender – call us for further details.
10. Do Everything You Can – While it may not seem like it now, there will come a time when your current financial troubles will pass. You will feel much better knowing that you did everything you could to avoid this devastating financial consequence that so many people face today.
If you are considering a short sale on your Tampa Bay home, please speak to a real estate attorney first, and then make sure you choose a real estate agent who is experienced with listing and getting short sales CLOSED. We use a professional negotiator service that we work in tandem with to get our short sales closed fast – and we never charge our sellers a dime. The bank pays all fees. We currently have a 100% success rate getting our short sales successfully closed with the banks!
While we are not attorneys, if you need clarification on some of these issues – please reach out and we are happy to connect you with a few good real estate attorneys to help you figure out the best option for you. We are in this together.
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