If you’ve exited mortgage forbearance but still find yourself struggling to pay back what you owe — or even just to afford day-to-day expenses after catching up on your mortgage — you’re not alone.
On April 6, global information services company Experian reported that due to the pandemic, total outstanding U.S. consumer debt skyrocketed from $800 billion to around $14.9 trillion in 2020. In addition, Debt.org, America’s Debt Help Organization, estimated that the average American has $90,460 in debt.
This includes all types of debt, from credit cards and personal or student loans to mortgages.
A Credit Karma survey of more than 1,000 homeowners in forbearance in April 2021 found that 31% used the extra funds for groceries, medical costs, and pandemic-related expenses like homeschooling supplies. Close to 32% saved the extra money by putting it into an emergency fund or savings account.
Black Knight, a software, data, and analytics company for the mortgage, lending, servicing, and real estate industries, noted in their June 2021 Mortgage Monitor that when it comes to COVID-19-related forbearances specifically, 591,000 of the 5.7 million homeowners who have exited the program are currently delinquent on payments. This number is only expected to rise, as the figure is already three times the pre-pandemic rate.
Repayment options for homeowners exiting forbearance are widely dependent on their mortgage servicer and the type of mortgage they have (i.e., backed by Fannie Mae or Freddie Mac, FHA loan, USDA loan, VA loan).
Some homeowners must pay what’s owed in a lump sum, some have agreed to increased mortgage payments for 6 to 18 months until the debt is paid off, and others are given the option of paying a lump sum at the end of their mortgage.
Yet another option is a loan modification, in which the mortgage servicer reduces the interest rate and/or extends the loan’s term to provide the homeowner with a more affordable mortgage.
Homeowners who put down less than 20% or have less than 20% equity in their home when they refinance are required to buy mortgage insurance to protect the lender’s investment. Homeowners should compare rates from the top mortgage insurance companies and remember that this insurance will not cover them if they can’t pay; it only covers the lender’s loss.
Regardless of how homeowners are paying back forbearance debt, those that are struggling often find themselves dipping into emergency funds or even retirement savings to stay afloat. However, there are ways to prevent forbearance-related debt from depleting your savings or dipping into your retirement fund earlier than you’d like.
You still have several financing options, both conventional — like various types of loans — and nontraditional, to enjoy more financial flexibility. Explore them below and learn more about mortgage forbearance resources.
Personal loans enable you to use the cash you receive for many different purposes. However, there’s a lot to consider before applying, and the loan amounts can be on the smaller side, so if you’re seeking a large amount of funding, it may not be a great fit.
Five things you need to know when applying for a personal loan include: your income level and what it will afford you, how your credit score may help or hurt you, whether you’ll need a cosigner, and proof of identification and verification of your employment.
Home equity loans
A home equity loan is attractive because it has a fixed interest rate and offers a lump sum payment but can be a challenging choice if you’re already struggling financially, as the loan must be paid back on top of your monthly mortgage payments, and there might be prepayment penalties if you pay off the loan early.
In addition, qualification criteria can be quite strict, with most lenders requiring a credit score of at least 620.
Home equity line of credit (HELOC)
A HELOC gives you the flexibility to access as much money (typically up to about 80-90% of your home’s value) as often as you want. But there are downsides to this option as well: variable interest rates make for unpredictable monthly payments, and your lender can freeze your HELOC if your credit score or home value decreases.
Like a home equity loan, HELOCs typically require a minimum credit score of 620, and they not only come with prepayment penalties, but, according to a June 25th Lending Tree article on home equity loan closing costs, they may also have minimum annual draw requirements and potential cancellation fees, depending on your lender.
Home equity investments
A home equity investment gives you access to your equity in exchange for a share of your home’s future value. With a Hometap Investment, you don’t have to deal with the hassle of interest or monthly payments. The investment also has an effective period of 10 years, so you have until then to settle the investment through a buyout with savings, refinancing, or selling your home — and there aren’t any prepayment penalties if you decide to settle early.
The process is simple. You request an investment and find out if you prequalify in a matter of seconds. Based on the information you provide, they’ll prepare an investment estimate for your property and assign you to a dedicated investment manager to assist you throughout the process. If it’s a mutual fit and you decide to apply, you’ll complete a short online application.
They’ll order a third-party home appraisal to determine the value of your home. Based on this data, combined with the information in your application, they’ll prepare an investment offer. Once you accept the investment offer, there is a signing. A few days after closing, the funds will be wired to you.
With a cash-out refinance, you’re paying off your current mortgage with one that has a balance of more than you owe on your home. Many homeowners like this option because, in some cases, it allows them to secure a lower interest rate on their mortgage.
On the other hand, a cash-out refinance may lengthen your mortgage payoff timeline, and you’ll also be responsible for all of the fees that you paid the first time around, including application, closing, origination, and possibly appraisal fees. This option has similar credit score requirements and may come with prepayment penalties and cancellation fees.
As you can see, there are many options for finding your footing after mortgage forbearance, but the best one for you depends on your personal financial situation and goals. With some research and planning, you can put your forbearance payments behind you once and for all and move forward confidently.
Jonathan MacKinnon, Hometap’s VP of Product Strategy and Business Development, is responsible for defining and executing on new product offerings, as well as forming strategic partnerships. He has more than 15 years of experience.