If you are having difficulty keeping up with your mortgage payment, there are several options available to help you get back on track to make on-time monthly payments. Two commonly used agreements you might consider: forbearance and deferment. But these two options impact your mortgage loan, term, and payments differently.
Knowing how each agreement works, and how they need to be repaid, can help you make a more informed decision about which option is better suited to address your current short-term financial needs.
Mortgage forbearance vs. deferment
Mortgage forbearance and deferment are often misconstrued as being interchangeable terms since there are only nuances between each, says Shmuel Shayowitz, president and chief lending officer at Approved Funding—a direct mortgage lender with over three decades of experience providing loan solutions for homeowners.
Mortgage forbearance is an agreement between the homeowner and lender to temporarily pause or reduce mortgage payments. Any missed payments are required to be repaid once the forbearance period ends, but there are multiple repayment options available for homeowners.
Mortgage deferment is an agreement to move past overdue mortgage payments to the end of loan term to be paid at a later date. “One way to think of deferment is like hitting a snooze button on an alarm,” says Shayowitz. The alarm will still go off, just at a later time.
Mortgage forbearance and deferment agreements give homeowners facing hardships time to lower or pause their monthly payments while they get their finances back in order. Understanding how these two options work and their benefits can help you make a more informed decision as a borrower.
What is mortgage forbearance?
Forbearance is a three to six month pause or reduction in your monthly mortgage payment without the risk of foreclosing on your home. After the forbearance period ends, you are responsible for paying back any missed or reduced payments.
Forbearance gives homeowners time to deal with temporary financial hardships that may prevent you from making your mortgage payments—such as an unexpected loss or reduction in income, unexpected expenses, or job displacement as a result of the Covid-19 pandemic.
How mortgage forbearance works
If you become aware you will not be able to make your monthly payments on-time, you should contact your mortgage lender to discuss payment options, says Shayowitz. Depending on your unique situation, you may be able to pause or reduce your current payments, but interest will still accrue on any unpaid balances during this time. Your lender may require proof of your financial hardship.
After the forbearance period ends, you will resume making your regularly scheduled mortgage payments. Additionally you’ll have to repay any missed payments using one of these four payment methods.
- Repayment plan. A small portion of the owed balance is added to your regular monthly mortgage payments until it is paid off—this may last up to several months.
- Loan modification. Your lender may agree to reduce your monthly payment to a more affordable amount and add any missed payments back into the balance owed. This option may extend the term of your loan, so it should only be considered if you can no longer make your regular mortgage payment.
- Reinstatement. If you have the funds available, you may be able to pay back your missed payments all at once as a lump sum.
- Deferment. Your lender may agree to postpone any missed payments to the end of your loan if you can make your regular payments, but cannot afford to pay a higher payment.
Typically, mortgage forbearance agreements last for three to six months, depending on the borrower’s unique situation. But in 2020, the CARES Act gave borrowers impacted by Covid-19 the option to extend their forbearance period for up to 18 months for eligible homeowners.
Mortgage loans aren’t the only kind of loan that allow a forbearance agreement—student loans, car loans, and personal loans provide this option for borrowers facing dire financial hardships. Credit card payments may also offer forbearance agreements.
Pros and cons of mortgage forbearance
Mortgage forbearance can help homeowners avoid foreclosing on their mortgage during short-term economic setbacks, which can have a significant negative impact on your credit score. Homeowners can continue living in their home while they come up with a plan to repay their owed balances on any missed or reduced mortgage payments.
One potential con: Interest continues accruing during a forbearance period, which may increase your future monthly payments. If you are already having difficulty making your current payments, this option may not be the best fit. Forbearances are reported in your credit history, which may impact your ability to refinance your mortgage or qualify for a new loan for a short period after forbearance.
What is mortgage deferment?
Deferment is a temporary suspension in your monthly mortgage payment, typically lasting three to six months. After the deferral period ends, your missed payments are added onto the end of the loan term to be paid at a later date—or earlier if the home is sold or transferred, or the loan is refinanced.
Deferment is commonly used to give a homeowner who is already behind on their payments time to catch up. To further help out struggling homeowners, lenders also pause interest on these missed payments.
How mortgage deferment works
Mortgage deferment is an option available to homeowners who need help catching up on their overdue mortgage payments due to unforeseen financial hardships. This can help you save money on late fees and avoid a missed payment reflecting on your credit history.
Your lender will then determine if your situation is eligible for deferment—and if so, they will communicate the terms of the agreement, including the length of the deferral period and future payment due dates.
After approval, any regularly scheduled payments during the period and past due amounts will be added to the end of the term of the loan to be repaid. During this time, interest will not accrue on the amounts owed.
Typically, mortgage deferment periods last for three to six months. However, homeowners impacted by the Covid-19 pandemic were given an extension of up to 18 months. Aside from mortgages, other financial obligations offer payment deferrals including student loans, car loans, personal loans, insurance and credit card payments.
Pros and cons of deferment
When your loan is deferred, any overdue payments are added to the end of the loan term. Lenders agree to deferments to help homeowners avoid foreclosing on their home and continuing to receive late payment fees, which negatively impact your credit score. Typically, interest does not accrue during the deferral period, so payments stay the same.
On the downside, agreeing to a deferment also means you agree to continue paying your mortgage past your initial loan term length. Before choosing to defer your loan, you should carefully decide whether your current financial situation is short-term and can be resolved by the time you resume your payments—otherwise you risk falling behind on your loan again.
How to choose between the two
If you are deciding whether you should go into a forbearance or deferment agreement on your mortgage, you should consider both your current and future financial state.
If your current financial setback is temporary, meaning it will be resolved within 90 days or less, you might be better off forbearing your loan. But if you anticipate that your current situation will impact your ability to repay your missed payments on top of your regular mortgage payments, then deferring your loan payments to the end of the loan term might be the best option.
Regardless of which option you choose, it is important to be extremely transparent with your lender throughout the entire process so they can help you make informed decisions about your repayment strategy.
“[Lenders] work extremely hard to try to accommodate people who are having hardships and circumstances that prevent them from making payments,” says Shayowitz, “[Lenders] do not want to foreclose on homeowners.”
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