In recent years, many Americans have experienced some form of financial hardship. Sometimes, these hardships can hamper our ability to repay loans or other debts. In these cases, most financial institutions have options for borrowers to pause or defer payments. These alternatives have become especially important for homeowners, as mortgage forbearance and mortgage deferment plans have proven to be the only options for those who have found themselves unable to keep up with their financial obligations. Let’s take a deeper look at both mortgage forbearance and mortgage deferment to understand how each works and their differences.
What Is Mortgage Forbearance?
Forbearance pauses or reduces the mortgage payments a borrower must make each month to their lender or loan servicer. Forbearance typically requires proof of hardship as well as an approval process by the lender. While most hardships are financial in nature, borrowers may qualify for forbearance due to extenuating circumstances like a natural disaster or the COVID-19 pandemic. In fact, the CARES Act of 2020 provided a mortgage forbearance option for millions of Americans with government-backed mortgage types, including VA, FHA, and USDA loans.
While delaying the due date may be a financial lifesaver for some borrowers, it’s important to remember that forbearance does not mean forgiveness. Payments the borrower misses during a forbearance period still must be paid back at a later date. However, lenders will generally work with borrowers to identify manageable repayment options. Each lender may have their own criteria for determining whether borrowers qualify for forbearance, so it’s important to contact to them directly during a period of hardship to discuss whether you might be able to participate in a forbearance program.
Pro-Tip: If you regularly struggle with your mortgage payments, refinancing your mortgage may provide a better long-term solution than either forbearance or deferment.
Does Forbearance Hurt My Credit?
How forbearance affects your credit score depends on several factors. For example, if you qualify for forbearance as a part of a government program, such as COVID-19 relief or an emergency order, there should be little to no effect on your credit. Financial institutions may be restricted on what they are able to report to credit bureaus in these instances. However, this won’t always be the case. If you enter into a mortgage forbearance agreement with a private lender, they will likely report the event to the credit bureaus. Just remember that any potential damage to your credit due to a forbearance on your mortgage will be far less severe than delinquent payments or even a foreclosure.
Pro-Tip: If your mortgage is delinquent before beginning the forbearance period, it may continue to be reported as delinquent until you can bring your account back to good standing. To avoid this issue, make sure your loan is current at the time you initiate the forbearance.
What Can You Do When the Forbearance Period Ends?
If you do participate in a forbearance period, you will eventually need to repay the missed payments.. When discussing repayment of your forbearance, your lender may present several options:
- Reinstatement: allows you to pay the entire amount in a single lump sum.
- A Repayment Plan: allows you to pay the amount back in installments over a set period of time. This would be similar to having a signature loan alongside your remaining mortgage payments.
- Loan Modification: changes the terms of your original loan, typically adjusting either the amount owed each month or the loan's term.
- Deferment: allows you to pay the owed amount at the end of your loan. Mortgage deferment can be collected either when you pay the mortgage in full or when you sell your home.
What Is Mortgage Deferment?
Deferment is the practice of adding the amount not paid during a forbearance period to the end of a loan. It can be an excellent option for borrowers coming out of forbearance without a way to repay the missed payments. Similar to forbearance, lenders generally determine the deferment qualifications. Typically, a borrower must apply for a deferment before their forbearance period ends.
Does Deferment Hurt My Credit?
Deferment on a loan that is not delinquent shouldn’t have either a positive or negative impact on your credit. Of course, each lender may have their own practices for reporting deferments to credit bureaus, so it’s worth discussing before entering into an agreement. However, skipping or delaying a payment without approval from your lender will almost always hurt your credit score.
Pros and Cons of Mortgage Deferment
There are several potential benefits to deferring your mortgage, but there may be drawbacks as well. Here are some things to consider:
- You can defer the amount you owe to the end of your loan.
- The lender may still observe teh original terms of your loan.
- Deferment should not hurt your credit score.
- You still owe principal and interest amounts in full.
- If you sell your home, the lender will take the money you owe from your portion of the sale.
How to Make the Best Decision for Your Financial Future
When it comes to your financial future, charting the right course can feel overwhelming – especially if you’re in the middle of a financial hardship. Fortunately, tools like mortgage forbearance and deferment exist to help borrowers navigate through their most difficult seasons. If you’re struggling to get your monthly expenses under control, the best way is to pay down your debt. This is easier said than done, but with careful budgeting and some strategic planning, you should be able to start making progress on eliminating monthly expenses and freeing up your money.
Options for Homeowners
If your own your home, you understand that it’s probably the largest financial investment you’re ever going to make. It can also be your safety net when times get tough – especially if you’ve lived there for a while. Remember, as you’ve made payments on your home over time, you’ve built up equity. You may be able to cash out your equity at any point with a home equity loan or by refinancing your mortgage.
At First Service, we offer several home loan options to help you make the most of home ownership. Whether it’s getting you the right mortgage to purchase your dream home, refinancing an existing mortgage to make it work for you, cashing in your home’s existing equity, or getting money to make improvements to your home, our team of local, knowledgeable advisors is here to help. Fill out the form below to get started!