The COVID-19 pandemic has caused millions of people to experience a significant decline in their incomes. Although the CARES Act allowed homeowners to seek mortgage forbearance for up to 12 months, that protection is set to expire for most borrowers by the end of April 2021. Despite this, few financial professionals are expecting a significant number of foreclosures on the horizon, in the near future.
According to a survey conducted by MBA, 30% of those who took forbearance as of May 2020 were making their mortgage payments. This suggests that some borrowers simply took advantage of this option to provide themselves with financial flexibility during an uncertain time. Furthermore, data suggests that most borrowers were able to remain current on their mortgages as restrictions were lifted throughout 2020.
Depending on where a person lives, it can take up to three years to complete the process of foreclosing on a property. During that time, a lender will likely need to spend a significant amount of money on legal fees. Therefore, a mortgage provider typically prefers to work with a borrower to make it easier for that person to stay current on an existing loan.
In some cases, a lender may agree to defer payments for several months until a borrower is in a better financial position. A loan provider may also agree to extend the term of an existing mortgage to reduce its monthly payment. Alternatively, the interest rate may be reduced to make each monthly payment more affordable.
An increase in real estate prices in recent years, and foreclosures on the horizon, means that homeowners are more likely to have positive equity in their homes. Therefore, those who cannot afford to keep up with their mortgage payment may choose to sell their properties. They can then use the proceeds from the sale to repay their lenders without experiencing any negative impact to their credit scores or histories.
A short sale may allow a borrower who has negative equity in his or her property to walk away from a mortgage before a foreclosure occurs. As a general rule, a person who engages in a short sale will experience a steep drop in his or her credit score. However, it can be preferable to a foreclosure as it indicates to future lenders that a borrower made a good faith effort to handle an outstanding debt balance.
Although it is unlikely that there will be a massive uptick in foreclosures on the horizon in 2023, not everyone will avoid having their properties repossessed. This is why those who work for mortgage companies are encouraged to invest in the tools necessary to account for any extra volume that they experience over the next several months.
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