Suppose you’re a homeowner that is having trouble making your mortgage payments. In that case, it may be time to look into mortgage forbearance or deferment, as these alternatives will help you avoid foreclosure. While both terms are often utilized interchangeably, there are minute differences between the two. Forbearance simply means pausing your mortgage payment, while deferment is an option once a forbearance term is completed to take care of any missed mortgage payments. If you’re experiencing financial hardship that’s impacting your ability to pay your mortgage, seeking guidance from an experienced real estate lawyer can be beneficial.
How Do You Qualify for Mortgage Forbearance or Deferment?
Mortgage forbearance and deferment are very similar, meaning they are often used interchangeably by lenders. The eligibility period is determined by the lender but is usually no more than one year. Those interested in pursuing mortgage forbearance or deferment must meet one or more of the following requirements to qualify:
- Home cannot be permanently vacated
- Home must be the borrower’s principal residence
- An expense-to-income ratio must be stated by the lending bank
- Borrower’s monthly expenses must be a certain percentage of their monthly income
Exploring Mortgage Forbearance
A mortgage forbearance is a temporary agreement between a borrower and lender to suspend or reduce payments for an allotted amount of time. Many in today’s economy request a mortgage forbearance if they’ve recently experienced a form of financial setback such as job loss, prolonged illness, or injury.
How Does It Work?
The lender involved in a forbearance agreement agrees to accept reduced payments or no payments for a time frame of no longer than 12 months. Once the forbearance period ends, the borrower or property owner is required to resume payments, repay the amount owed during the forbearance period, and any interest or additional fees. Repayments can be made in full or up to 12 installments, which are usually added to the predetermined regular monthly payments. Forbearance agreements are generally requested for mortgages; however, each scenario works differently depending on the borrower’s unique situation.
Homeowners may request a mortgage forbearance if they need to catch up on payments and avoid foreclosure. It’s common for lenders to request proof that a homeowner is experiencing a temporary financial hardship along with assurance and a plan that the borrower will be capable of paying back the owed amount once the forbearance period ends. Any foreclosure proceedings are halted during the forbearance period, and the borrower can make reduced payments or no payments at all. If financial hardship lasts longer than anticipated or funds aren’t available to make repayments, a loan modification may be an option between the lender and borrower.
What About Interest?
On mortgage forbearance, interest will accrue unless the lender states otherwise. Interest accrues on skipped or lowered payments in mortgage forbearance, meaning the borrower must pay back what is owed during the forbearance period along with accrued interest.
Mortgage Forbearance and Your Credit Score
A borrower’s credit score may be affected if the lender reports a mortgage forbearance to the credit bureau. If the borrower wishes to refinance or purchase a new home, reestablishment as a credible borrower must be achieved by repaying the full amount owed. A temporarily lowered credit score from a mortgage forbearance is better than a missed payment and helps avoid foreclosure, which would then stay on the borrower’s credit report for seven years.
Exploring Mortgage Deferment
A mortgage deferment is a temporary agreement between a borrower and lender to delay or suspend loan payments for an allotted amount of time. Many in today’s economy request a mortgage deferment if experiencing financial hardship as it temporarily halts required repayments. Those choosing a mortgage deferment may experience higher monthly payments and a loan term increase as a result.
How Does It Work?
Payments are suspended during a deferment period similar to forbearance, but for a shorter amount of time. Borrowers are also not required to pay back the owed amount all at once, which differs from a mortgage forbearance. Instead, any owed amount is added to the end of the loan’s term, thus increasing the loan term overall. Every situation is unique, meaning deferred payments work differently based on individual circumstances.
When applying for a mortgage deferment, the lender will likely ask the borrower for a brief explanation outlining why payment deferment is necessary. It’s common for lenders to consider a borrower’s credit score and report before deciding. While mortgage deferment may seem like a viable solution in the here and now, it may be more beneficial to explore refinancing options as financial hardships can often last longer than expected.
What About Interest?
Whether or not a borrower is charged interest during mortgage deferment depends on the type of loan and the lender’s decision. A borrower may be responsible for the accrued interest during the payment postponement period but might not be if the interest rate only applies to the principal balance. This means that the borrower will not be charged additional interest on the accrued interest. Once payments are restarted, accrued interest during the mortgage deferment period may be applied to your principal balance along with your interest rate resulting in more accumulated interest once regular payments are resumed.
Mortgage Deferment and Your Credit Score
A borrower’s credit score is usually not impacted by mortgage deferment once the lender reports the agreement to the credit bureau. However, if the borrower stops making payments or misses a payment, their credit score could be impacted. Approval for mortgage deferment may be granted after the agreement with the lender has already started, meaning payments must continue to be made on time until verification of deferred payments is received to avoid damaging your credit score and history.
How Can a Real Estate Lawyer Help?
Experiencing financial hardship is already stressful and can often be challenging to navigate. A real estate lawyer experienced in mortgage forbearance and deferment can help property owners avoid foreclosure, so you can catch up on past due amounts owed to your lender. Mortgage forbearance and deferment can benefit both the lender and borrower as the borrower will be released from the obligation to pay the mortgage loan during financial hardship, and the lender will no longer be required to sell the property. Instead, the lender agrees to work side by side with you to keep you in your home in the most affordable way possible.
You Don’t Have to Lose Your Home
Here at CJB Law, we understand how daunting financial hardship can be. Whether you’re experiencing financial hardship due to an illness or a worldwide event, it doesn’t mean foreclosure is your only option. Your home comes with a large investment, but it’s also the foundation of your life. Contact a dedicated real estate attorney with experience in mortgage forbearance and deferment, so you can explore all available options with guidance from an expert.