As more than half of U.S. homeowners saw double-digit percentage increases in their home’s equity – the current market value minus the current mortgage balance – in the fourth quarter, some mortgage borrowers became more vulnerable to the financial impact of Covid-19, putting their home at risk of default or foreclosure.
About 62% of mortgage-linked properties saw a 16.2% increase in equity in the fourth quarter of 2020 compared to a year earlier, according to the latest CoreLogic Homeowner Equity Insights report. That spike equates to $ 1.5 trillion in additional equity.
Although home values are increasing across the country, some areas are lagging behind. This can make it more difficult for struggling homeowners to sell, refinance, and even dip into equity when they need it.
Greater financial obstacles observed in the south and northeast
A recent report by Attom Data Solutions found that owners in some areas of the country face greater challenges than others as of the first quarter of this year. Major setbacks such as underwater mortgages (when the home loan is greater than the home’s value), foreclosures and local wages that fell below homeownership expenses were most pronounced in Florida, Illinois, New Jersey, Connecticut and North Carolina.
“The reasons for the regional variations in the different levels of risk are likely related in part to the appreciation of house prices and incomes,” said Todd Teta, director of products at Attom Data Solutions.
“The Northeast has seen the smallest price increases – typically about a third since 2012. In more affordable areas of the country, clustered in the South and Midwest, these housing markets are likely to have foreclosure rates. higher because homeowners there likely have less money and fewer resources to stay up to date on mortgage payments if they lose their jobs or face other financial issues such as major medical expenses. “
In half of the most vulnerable counties, homeownership costs exceeded 30% of the average local wage. These costs include monthly mortgage payments, insurance and property taxes. Most experts recommend that consumers spend less than 30% of their gross monthly income on housing.
Options for distressed homeowners with negative equity
Homeowners today are taking advantage of the hot housing market, which is driving property values up. On average, homeowners across the country saw a $ 26,000 increase in their home equity in 2020, according to CoreLogic.
Depending on where you lived, those earnings were considerably higher – California, Idaho and Washington state on average have $ 50,000 in annual home equity increases. Meanwhile, states like North Dakota, Iowa, and Oklahoma have seen significantly smaller stock increases, averaging $ 9,000 a year.
For homeowners who can no longer pay their mortgage payments, the amount of equity in their home can be the difference between selling for profit and facing foreclosure. Typically, homeowners need 10% or more of their home’s equity to cover closing costs, as well as overdue mortgage payments.
If your mortgage is more than the value of your home, you have negative equity. This is also known as being upside down or under water with your mortgage. While this is not the ideal position, there are options.
1. Request for abstention
For homeowners facing financial hardship due to Covid, there is still time to apply for forbearance, which allows you to withhold mortgage payments for up to 18 months. For homes backed by Fannie Mae or Freddie Mac, the deadline to request forbearance is June 30. There is also a foreclosure moratorium on federally backed homes that will expire on June 30.
About 70% of owners are eligible for forbearance. For borrowers who do not have loans guaranteed by Fannie or Freddie, it is always possible that your lender will offer a forbearance plan or some other type of help.
Borrowers who wish to enter into a forbearance agreement should contact their lenders – this is not an automatic program. Documentation of your financial hardship is often not required, you just need to certify that you have been affected by Covid.
2. Refinance your mortgage
Refinancing a mortgage with negative equity is nearly impossible, but there are two federally funded programs that give underwater homeowners a chance to refinance.
The Fannie Mae High LTV (Loan to Value) Refinance Option and the Freddie Mac Enhanced Relief Refinance are both programs designed to help homeowners who are up to date on their mortgage payments but have a higher LTV ratio than allowed. standard refinancing.
The benefits of refinancing through these programs are that you can lower your monthly payments, lower your interest, or switch from a variable rate mortgage to a fixed rate.
3. Request a loan modification
Homeowners who have experienced job loss or income reduction, or who are nearing the end of a forbearance period (and still cannot afford their regular mortgage payments), may be eligible. to a loan modification through their lender.
A loan modification basically happens when your lender changes the terms of your mortgage to make it more affordable for you. These loan modifications are generally permanent and can include a variety of changes such as extending the term of your loan (which can lower your monthly payments); reduce the principal amount or the interest rate. Sometimes lenders combine a few changes.
Unlike refinancing, which can incur high fees, changes are free because eligible borrowers generally cannot afford expensive refinancing fees. But sometimes the process can be long, so be sure to talk to your lender early on about financial difficulties.
Consider a short sale
A short sale is an ultimate option if you cannot refinance or sell for a profit and you are facing foreclosure. Basically, a short sale occurs when a lender agrees to sell your property and write off the losses if they sell less than the mortgage balance.
Some lenders might be tempted to take a short sale if they don’t want to deal with the headaches, time and money of foreclosure. The advantage of a short sale over foreclosure is that you will keep your credit profile intact.
However, homeowners should think about where they might live after a short sale, as the current real estate market is not on the buyer’s side.
“Evaluate the market and where you plan to live after selling your home,” says Julie Aragon, mortgage broker with Julie Aragon Lending Team in Los Angeles. “In most parts of the country, real estate is scarce and in high demand, so now is not a good time to be a buyer. Make sure you plan a few steps in advance if you are considering selling your primary residence. “
At the end of the line
The most important thing to do if you are having trouble making a mortgage payment is to contact your lender immediately. Often, financially troubled homeowners are already worried and anxious, so they postpone their relationship with lenders to avoid additional stress.
However, it is the worst decision you can make. Instead, know what your options are (see above) and work with your lender to find a solution that is financially manageable and allows you to stay at home.