Anyone can fall on hard times. Most Americans make healthy financial decisions including regularly paying their mortgage, but bad luck or circumstance can make these basic tasks difficult. What do you do when you can’t pay your mortgage?
The last thing you want is for your credit to turn upside down, but you do have options with a mortgage forbearance or mortgage deferment.
Both mortgage forbearance and mortgage deferment are used for financial hardships, but they mean different things and have different consequences. Let’s explore the important differences in forbearance vs deferment mortgage, what they mean for those who need help, and how to further explore any financial hardship options.
It’s easy to panic when you can’t make your mortgage payments but using forbearance or deferment can keep your creditors informed and help get you out of immediate trouble.
WHAT IS MORTGAGE FORBEARANCE?
A mortgage forbearance, also known as a mortgage forbearance extension, is putting your mortgage payments on hold for a temporary window. The amount of time a mortgage is put on hold is determined by the mortgage lender, the borrower, and other factors but it’s often six months to a year. Interest continues to accrue while on forbearance and all missed payments are due at the end of the forbearance period.
WHAT IS MORTGAGE DEFERMENT?
Mortgage deferment is putting off (deferring) or reducing your mortgage payments for a certain period, usually until the end of your loan period. Most homeowners cannot make all payments due from forbearance, so they use deferment to make those owed payments easier. Most lenders do not add interest to loans in deferment.
WHO IS MORTGAGE FORBEARANCE RIGHT FOR?
Mortgage forbearance is designed for someone facing temporary setbacks. For example, a two-month illness that sets you behind on your payments, but you’ll be back on your feet soon.
WHO IS MORTGAGE DEFERMENT RIGHT FOR?
At the end of your forbearance period the money you paused on will still be owed. Most homeowners can’t make a lump sum payment at the end of forbearance, so they choose to defer the payments.
Remember you don’t have to choose one of the other. Often forbearance results in a deferment plan. Your lender or a qualified real estate agent can help you determine if each or both are best for your situation.
Forbearance and Deferment During COVID Hardships
Though the eviction moratorium is still in place in Colorado, you need to act quickly if you’ve experienced any COVID-related hardships in 2020, 2021, or 20222. The moratorium will soon close and anyone who has skipped mortgage payments without any contact with their mortgage lender could be in big trouble.
It’s easy to think of mortgage lenders as faceless bureaucrats but the truth is COVID has affected everyone, including lenders, and they don’t want to kick you out of your home if they don’t have to. To put it in perspective, there are more than 3.5 million mortgages on forbearance since the start of the pandemic.
Under the CARES Act, anyone who was financially impacted by the COVID pandemic can ask for mortgage forbearance up to a year though many lenders are already giving better deals to their borrowers.
Ultimately, every lender is handling COVID related hardships different so it’s best to call them to explain the situation. You can discuss if forbearance is right for you and terms both you and your lender can agree on without your credit being dragged through the mud. You might need to prove your financial hardship to your lender.
HOW LONG CAN YOU DEFER YOUR MORTGAGE?
Deferment terms depend on the individual lender, but most allow up to a year of deferment. You’ll need to call your individual lender for your terms.
Mortgage Forbearance Extension Advantages and Disadvantages
Doesn’t Wreck Credit – A forbearance will keep your credit score from plunging into the toilet from missed payments.
No Late Fees – Loans in forbearance don’t rack up fees.
Still Owed – Forbearance doesn’t make payments go away but pushed to a later date.
Might Ding Credit a Little – It’s not the 7-yar penalty of foreclosure but your credit might take a hit from forbearance.
Must Qualify – Not everyone qualifies for forbearance though the CARES act temporarily helps more people than normal qualify for forbearance programs.
Mortgage Deferment Advantages and Disadvantages
More time – Deferment allows you more time to pay back your loan after your forbearance has ended. Without deferment all your payments from forbearance are due immediately.
Flexibility – Make it easier to plan where your money needs to go.
Must Qualify – Your lender must agree on a deferment plan.
HOW DO YOU PAY BACK MORTGAGE FORBEARANCE?
Though it depends on the lender there are generally a few different ways to pay back your mortgage forbearance especially after the leniency granted by the CARES Act.
Lump Sum – Paying back all missed payments (with interest) after forbearance ends.
Payback Plan – An agreed upon plan with your lender, often extra money on monthly payments.
Loan Modification – Will be discussed more later but changing loan terms to better suit your finances.
Deferment – Deferring the missed payments until end of loan period.
Alternatives to Mortgage Deferment or Forbearance
Deferment or forbearance are not the right choices for everyone. If you’re having only minor trouble making payments or facing a very temporary crisis you have other options:
Refinancing – Refinancing your current loan into better payment terms for your situation. Refinancing can help many homeowners with small struggles get back on their feet.
Loan Modification – Changing the terms of the loan might get you a better interest rate or payment.
Call Your Lender – Communication is key to keep everyone informed and help you avoid penalties. If you’re facing a small mortgage issue or might miss a small number of payments its best to call your lender and explain the situation.
Help with Forbearance vs Deferment
Forbearance and deferment are complicated processes, but you might need them in case of hardship. If you need more help with your loan or need to explore your options, call The Storck Team. The Storck Team knows many families have been hit hard by the coronavirus pandemic and might need help finding the best solution. If you need assistance with your mortgage or what to say to your lender, call The Storck Team today – we’re here to help.