If you’re in need of mortgage relief, it’s important to understand your options.
Though commonly described as two similar options for pausing mortgage payments during temporary hardship, forbearance and deferment (also referred to as payment deferral) technically happen during two different parts of the mortgage relief process.
In fact, these two relief tools can be used in tandem.
First, forbearance allows a homeowner experiencing hardship to temporarily pause their mortgage payments. Then, once they’re ready to resume payments, deferment may be offered as a repayment option, allowing the payments that were missed during the forbearance period to be due at the end of your loan term.
In spite of these differences, the terms are often used interchangeably, particularly when referring to the types of relief offered to homeowners amid COVID-19.
What should homeowners know about forbearance vs. deferment? Let’s take a look.
Mortgage Forbearance, Defined
Mortgage forbearance is a mortgage relief option that helps borrowers experiencing financial hardship stay in their homes while they get their finances back on track.
Forbearance, if the lender agrees to it, allows a borrower to temporarily pause making mortgage payments, or to pay a reduced amount each month.
This option is typically only available to those experiencing temporary financial hardship – job loss, natural disaster, illness or death of a wage earner, for example. Once your forbearance period ends, you’ll need to be able to resume your payments and come to an agreement with your lender on how to pay back the payments you skipped.
There are a few different ways to pay back your skipped payments at the end of your forbearance period.
- Repayment plan: Your lender or servicer may work with you to create a repayment plan that has you make additional payments (added to your regular mortgage payment) each month until you’ve paid back your skipped payments.
- Loan modification: If you find yourself permanently unable to keep up with your mortgage payments as they’re currently set up, you may be eligible for a loan modification. With a modification, your lender or servicer may agree to change certain aspects of your loan, such as extending the length of your term, reducing your rate or adding missed payments to the loan balance, to help make your monthly payments more affordable.
- Deferment or deferral: When you defer your missed payments, it means they’ll be moved to the end of your loan term. This amount will be due at the same time as your final mortgage payment or when you sell your home or refinance your mortgage.
If you’re able to, you have the option to pay back the amount you owe in a single lump sum to immediately reinstate your loan. Of course, this isn’t always possible for those who are exiting forbearance that was granted due to financial difficulties. Typically, your lender or servicer can’t require you to pay back your forbearance in a lump sum.
How To Qualify For Mortgage Forbearance
To find out if you’re eligible for forbearance, you’ll need to talk to your lender or servicer.
It’s important to reach out as soon as you’re unable to pay your mortgage or, ideally, as soon as you anticipate having trouble making payments in the near future. The sooner you talk with your lender, the better they can help you avoid foreclosure.
When you apply for forbearance, you’ll likely need to provide your lender with some basic information about your income and expenses. Depending on why you’re requesting the forbearance, you may also need to provide documentation of your hardship (such as an obituary in the event of the death of a wage earner).
For COVID-related forbearance, you don’t need to submit any additional documentation.
Mortgage Deferment, Defined
Mortgage deferment, or payment deferral, is a repayment option that may be offered to borrowers who have missed mortgage payments or are exiting forbearance.
If your financial hardship has ended and you’re able to resume making your regular mortgage payments, but aren’t able to pay back the amount you owe in missed payments, deferral may be a good option for you.
As we highlighted above, deferral defers your missed payments, moving them to the end of the loan, where they’ll be due when you make your last payment, sell your home or refinance your loan.
The word “deferment” is more often used to refer to a relief option offered on student loans. With student loans, forbearance and deferment are more closely related, as they’re both options for temporarily suspending or reducing loan payments.
Whatever words your lender uses to describe the relief options they’re offering, understanding the terms of that relief – and how you’ll need to pay it back – is what’s important.
COVID-19 And Mortgage Forbearance
Thanks to the Coronavirus Aid, Relief and Economic Security (CARES) Act, everyone with a federally-backed mortgage loan (including loans owned by Fannie Mae or Freddie Mac) has a right to obtain forbearance if you’re experiencing COVID-related financial hardship.
With COVID forbearance, you’ll be able to pause your payments for up to 12 months, in 6 month increments. This means that when you apply, you’ll initially up to 3 months of forbearance, which can automatically be extended to 6 months if you need it. At 6 months, if you still need relief, you can request an extension for up to additional 6 months. This needs to be requested through your lender or servicer
Q&A: Mortgage Forbearance Vs. Deferment
What Other Repayment Options Are Available After Forbearance?
Your repayment options after forbearance will depend on what your lender or servicer offers and what you’re eligible for.
As a reminder, the three main options for repayment after forbearance are:
- Repayment plan
- Loan modification
- Payment deferral
You also have the ability to pay back the full amount due and catch up right away if you choose. We understand this isn’t always an option.
Which of these options makes sense for you depends on your situation. If you’re able to pay off the amount you owe in a lump sum, that might be the best route to take. If you can’t afford a lump sum but are able to additional payments each month on top of your regular mortgage payment, a repayment plan might make more sense.
Those who are able to resume making payments but can’t afford to spend any more money each month might find that loan modification (where the terms of your loan are modified to make your payments more affordable) or payment deferral (where your missed payments are moved to the end of your loan) makes more sense for their situation.
Does Mortgage Forbearance Or Deferment Hurt Your Credit?
If your forbearance is COVID-related, it won’t be reported as a negative item on your credit report. This is a protection provided by the CARES Act. Your loan status will be reported the same way it was prior to the forbearance.
Regular forbearance, however, can negatively affect your credit. Additionally, if you already missed one or more payments before you were granted forbearance, that will also have a negative impact on your score.
The Bottom Line
Whether it’s called forbearance or deferment or something else, a temporary pause on your monthly mortgage payments can provide some much-needed relief to homeowners experiencing financial hardship.
As you work with your servicer to find a mortgage relief option that works for you, be sure you understand exactly how it will work, what you’ll need to do and how you’ll need to pay back your missed payments once the relief period is over.
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