This is a continuation of the first part of this post. To read the first part, click here
Forbearance is not a Pandemic term; it has existed for years. A forbearance is basically an agreement between someone in financial hardship and his or her lender. It allows John to skip mortgage payments, or reduce the mortgage amount he pays, for up to a year. The bank does not forgive the missed payments; rather, John must repay any skipped or reduced payments when the forbearance period ends.
The CARES Act helped buyers in forbearance in 3 important ways:
Prohibits lenders from charging any fees, interest, or penalties on skipped payments.
Bars lenders from reporting missed payments to credit bureaus.
Prevents lenders from starting the foreclosure process for at least 60 days.
Anyone with a federally backed mortgage loan with a COVID19 hardship qualifies for forbearance. Lenders offer forbearance for up to 180 days, with a 180 day extension if needed. When that period is over, John has 3 options:
He can pay all missed payments at once.
He can go on a payment plan to pay a little more each month on his current mortgage payments until the forbearance amount is repaid.
He can ask his lender for a loan modification and extend the life of the loan to tack those unpaid months on to the end of the loan.
WHEN FORBEARANCE IS NOT ENOUGH...
Let's say that John has to close his restaurant permanently though due to the Pandemic and he is in serious trouble. Due to John’s severe reduction in income, he will not qualify to do a cash out refinance now because he’d have to qualify with income he no longer has. At this point, John can sell his home and use the proceeds to pay off his forbearance and mortgage amounts. We are seeing many homeowners who are and who aren’t in forbearance selling their homes in order to cash out on equity and move to a different state with a cheaper cost of housing and living. John will not need to compromise the sales price in this hot market; therefore buyers will not be getting a deal on this house.
Most homes in San Diego have appreciated quite a bit since they were purchased, and most homeowners have equity. (In fact - 85% of San Diegans have positive equity in their home!) If John cannot sell his home for more than he owes, and a loan modification will not work, John’s option is to then ask the bank if he can do a short sale.
A short sale does not indicate a short time frame to sell your home, rather it refers to selling your home for less than it is worth. The process would be as follows: John would submit a short sale application to the bank; if approved the bank would essentially become the seller and approve the purchase price and negotiate it. The typical short sale takes about 3 months, and is often very competitive, as buyers want to “get a deal.” If the bank denies a short sale application, it will initiate foreclosure proceedings. At this point, buyers will be competing with all cash offers and a multitude of other buyers. While there were over 14,000 short sales in the U.S. in 2009, it is estimated that there will only be between 600-700 short sales in 2021. Only 10% of those currently in forbearance are vulnerable to becoming a short sale or foreclosure at this time.
WAIT OR BUY NOW?
So, should Marci throw her hands up and stop looking for a home? There is currently an extremely low supply of homes in San Diego; in January 2021 there were 65% fewer homes for sale than in January 2020! Demand is at an all time high, with record low mortgage rates. Mortgage rates are projected to increase as the Pandemic gets under control. For a buyer concerned with their monthly payment, it makes more sense to buy at a higher purchase price with a low interest rate (as a general rule, a 1% increase in rate equates to a 10% increase in monthly payment) than to wait for prices to stabilize or even decrease and purchase at a higher interest rate.
Though Marci is the one who will decide what her next steps are, it's helpful to have the full perspective when making her decision.
Have questions about buying homes during these unprecedented times? Contact us today. TeamKolker@Compass.com