Mortgage Forbearances Vs. Deferment: What's The Difference?
When tough times hit, the stress of making mortgage payments can make or break many homeowners. The extra strain can turn a bad few months into a full-on disaster. On the other hand, negotiating a payment break can give you the space you need to ride out the storm. Mortgage forbearance is an arrangement with your lender to either reduce or entirely pause your mortgage repayments for an agreed-upon period to get your finances back in order (per U.S. Consumer Financial Protection Bureau).
Mortgage forbearances are typically granted to borrowers experiencing some kind of hardship. During the COVID-19 pandemic, forbearances were granted to anyone with a federally backed mortgage, for example. According to Rocket Mortgage, if your difficulties are caused by more personal circumstances, then you may have to supply evidence to convince your lender to grant you a forbearance.
During the forbearance, interest accrues as usual, but you won't be charged late payment fees or other fines that would normally happen if you just stopped paying your mortgage (via Insider).
One thing to be aware of though is that unless you make other arrangements, the full amount that you have avoided paying will be due at the end of the forbearance period. So if you arranged a six-month forbearance on a mortgage of $1,000 per month, you'd pay nothing for six months, but in month seven, you'd need to pay a lump sum of $7,000. If that just sounds like trading today's pain for tomorrow's agony, then you may want to also discuss deferment with your lender.
What is a mortgage deferment?
A mortgage deferment is a way to catch up on repayments (that are skipped during a mortgage forbearance) that avoids having to make a big lump-sum payment, according to Fool. It is another agreement between you and your lender, this time to delay the forbearance payments until the end of your loan period.
Because so many homeowners who are facing financial difficulties severe enough to warrant a forbearance, also will need a deferment, the terms can seem interchangeable. The crucial difference is that a deferment, unlike a forbearance, will mean you are in debt for longer overall.
Another key difference between forbearances and deferment to be aware of is who can qualify for them. Per Rocket Mortgage, applying for forbearance is mainly about proving that an unexpected hardship has hit. Because you've already played that card when applying for a deferment, they are much more about typical financial indicators like credit score, income, and your ability to continue making payments. Just because you can qualify for forbearance does not automatically mean you qualify for deferment.
What are some alternatives to forbearances and deferment?
Luckily, not every disaster is the end of the world, and not every bad month means having to do something as drastic as applying for forbearances and deferments.
Two alternatives to forbearance (via Fool) are mortgage loan modification and refinancing. A mortgage loan modification is a renegotiation of the terms of your mortgage with your loan servicer. The most important terms are a) your monthly payments and b) how many months you're going to be paying off the loan. If you can renegotiate to a place that's comfortable for you, then pausing payments can be avoided altogether. Refinancing is essentially the same thing — changing the monthly payments and/or loan period, but by applying for an entirely new loan from an entirely new lender.
If you don't want to defer payment because it will tack extra months onto your loan period, but also cannot afford to pay a lump sum in full at the end of your forbearance, then a repayment plan may be what you need, according to TIME. This means spreading out the lump sum by making a small increase in your monthly repayments until the total is cleared.
Whatever you decide to do, it is of critical importance that you maintain good communication with your lender. They are best placed to advise you on your options, and they would much prefer you to be able to make your payments than to have to deal with all the red tape that lateness and foreclosures entail.