Loan Forbearance vs. Deferment: What’s the Difference?

    Are you facing hardship and worried about making monthly mortgage payments? Fortunately, homeowners have options to get some assistance in hard times. For example, during the financial crisis that began in 2020 as a result of the COVID-19 pandemic, the US government introduced a series of measures to bolster forbearance and deferment options.

    What is Loan Forbearance?

    If you are granted a forbearance, your mortgage payments can be reduced or postponed for a limited and specified period of time. Typically, a period of forbearance lasts up to six months. However, if you are still working through financial hardship at the end of this time period, you may be eligible for a six-month forbearance extension.

    Keep in mind that forbearance is not loan forgiveness. At the end of your forbearance plan, you will have to repay the full amount of your paused payments in one lump sum. In addition, interest continues to accrue during the forbearance period, even as payments are paused.

    What is Mortgage Deferment?

    The main difference between a period of forbearance and a deferment is when you will repay your postponed payments. After a period of deferment, you typically repay the deferred amount over a set amount of time. These repayments are added to your regular monthly mortgage payments, which means you’ll have to pay more than you’re used to when the deferment period ends.

    If you have a home loan backed by Fannie Mae or Freddie Mac, you may have another deferral option if you faced financial hardship due to the COVID-19 pandemic. Under this program:

    • You can postpone up to 12 months of payments
    • When deferment is over, you return to making your regular payments
    • The full amount of your postponed payments will be added to the end of your loan and will be due when you pay off your loan, decide to refinance or sell your home
    • No additional interest or late fees will accrue on your loan

    What to Do When You Can’t Pay Your Mortgage

    Taking advantage of these mortgage relief options is a process requiring you to take decisive, well-informed action. First, call your mortgage servicer, explain your situation and ask what options are available to you. Each servicer has their own rules and options available. Start this process as soon as you become aware of a potential financial problem on the horizon; don’t wait until you’re unable to pay your mortgage. Getting in touch as soon as possible, before you miss any payments, provides more options and helps you avoid penalties.

    Before you reach out to your servicer, it helps to have an estimate of your anticipated income and expenses alongside documentation of your hardship, such as a notice of employment termination, pay reduction or furlough. After reviewing your options with your servicer, do independent research on those options and read the fine print before signing anything. You want to have a good understanding of how much you’ll owe and when you’ll need to pay. Don’t agree to anything unless you fully understand and are prepared to handle all the terms and conditions of your forbearance or deferment plan.  Make sure you understand things like interest penalties and their long-term impact on your mortgage before you sign an agreement with your servicer.

    If you want to know how forbearance or deferment may affect you, reach out to me today. I’m here when you need me!