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Are At-Risk Homeowners Better Off Selling?

In some cases, owners exiting forbearance can’t afford their home. But with rising values, many can still sell, turn a small profit and not harm a strong credit score.

NEW YORK – Pandemic-related mortgage forbearance programs are expiring, but hundreds of thousands of homeowners continue to struggle with payments. When loan modifications don’t help, owners may find themselves at risk of foreclosure.

But selling the home, which probably accumulated a lot of equity over the past year, may be a better option.

In many cases, however, it’s an overlooked option, even though nearly a third of borrowers who start the foreclosure process have at least 40% equity in their homes, according to recent data from Black Knight, a mortgage software and analytics company. Home prices are up nearly 20% year-to-year, potentially providing more equity to those who need to sell and pay off their mortgage, CNBC reports.

Pandemic-related aid allowed financially struggling homeowners to miss their house payments for, in some cases, up to 18 months. But as those programs expire, three-quarters of a million homeowners have left such plans over the last three months alone.

Many mortgage servicers are willing to offer loan modifications and lower interest rates to borrowers who exit forbearance programs and find themselves financially unstable. But some borrowers still can’t make their payments.

More than half of the 7.7 million borrowers who exited forbearance programs are now current on their mortgage and have resumed making payments, according to Black Knight.

However, about 3% of borrowers – or 264,000 – are delinquent on their mortgage after their program expired, with 38,000 in active foreclosure. But they may not need to be.

Some homeowners may not realize how much equity they’ve built. About 87% of owners currently in foreclosure have positive equity, according to a RealtyTrac analysis. Further, about 73% of borrowers in foreclosure have more than 20% equity, and about 28% have more than 50% equity.

“While having equity didn’t prevent them from defaulting on their loans, it should provide them the opportunity for more of a soft landing – the ability to sell their home at a profit, satisfy their debt to the lender, and have money left over to give them a chance for a fresh start,” says Rick Sharga, an executive at RealtyTrac.

Source: “Thousands Could Soon Lose – or Sell – Their Homes as COVID Mortgage Bailouts Expire,” CNBC (Dec. 2, 2021)

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