Mortgage Forbearance Vs. Deferment: The Most Important Ways They Differ
Kevin Graham6-minute read
November 13, 2020
If you’re experiencing trouble making your mortgage payment, a mortgage forbearance along with a deferment may provide much-needed relief from a financial hardship. However, it’s important to realize that although the terms may be used interchangeably, they don’t mean the same thing.
The big difference between forbearance and deferral boils down to this. Forbearance is the act of pausing your mortgage payment. Deferment of payments is one option once you exit forbearance to take care of any missed payments when you pay off your mortgage.
This article will take a look at forbearance vs. deferment in the mortgage space, how it affects your credit as well as your present and future home financing options and which one is right for you.
What Is Mortgage Forbearance?
Mortgage forbearance is a temporary pause in your mortgage payments. Homeowners who request forbearance are often experiencing some sort of financial hardship temporary in nature. This might be a loss of a job, rebuilding and other expenses related to a natural disaster or an unexpected medical expense, for example.
Although we’ll be discussing mortgage forbearance, you can receive forbearance from other debts like student loans as well.
Forbearance timelines can vary depending on the reason for the forbearance, so speak with your servicer. A mortgage servicer is whoever you make your payment to. If you have an escrow account to spread out property tax and insurance payments, they’ll maintain this as well. This may or may not be the lender with whom you did your mortgage.
Once the forbearance is over, you have to pay back any missed payments, so it’s helpful to pay what you can during the forbearance. Rocket Mortgage® clients can make full or partial payments with the customer payment option in our Payment Center. That said, when the forbearance is over, you have several options for dealing with repayment.
What Is Mortgage Deferment?
Forbearance and mortgage deferment or deferral are terms that are often used interchangeably, sometimes even by servicers. However, deferral is actually an option for dealing with back payments that arises after someone has exited forbearance.
Also referred to as a partial claim, deferral involves taking a number of payments that you may have missed during your forbearance and setting them aside to be paid at the end of your loan. In order to get a deferment coming out of forbearance, your servicer has to agree to the deferral. You also have to let them know you’re capable of resuming your regular payment. If you can’t afford your original payment, you may have to look into qualifying for a modification.
Whether deferral is an option for you depends on qualifications and who your mortgage investor is. How many payments can be deferred depends on the situation and the mortgage investor as well. When it comes to COVID-19, Fannie Mae, Freddie Mac, the FHA and USDA are giving servicers the option to approve deferral of up to 12 months of payments to be paid when you pay off the mortgage.
Repayment Options After Forbearance
Deferment is just one repayment option. Your options may vary depending on what you qualify for, your mortgage investor and the type of forbearance you apply for, here are a few common scenarios:
- Repayment plan: You’ll have something added to your mortgage payments over an agreed-upon period of time until you pay back your past-due amount.
- Deferment: You continue where you left off with your regular principal and interest payment and pay back what you owe when you refinance, sell the house or otherwise pay off the mortgage. If you have an escrow shortage at that time, this payment is spread out over up to 60 months and added to your payment along with any existing changes to escrow.
- Modification: If you don’t qualify for either of the above, you may be able to have your loan modified by extending the term and/or lowering the interest rate in order to help make your mortgage payment more affordable.
If desired and possible, you also have the option of paying back the full amount due upon exiting the forbearance period. Obviously, this option isn’t for everyone.
Also, depending on the terms of your forbearance with your servicer, you may or may not have to pay more in interest and other fees as a result of paused payments. Please be clear with your servicer as to what the agreement is.
Qualifying For Forbearance
In order to qualify for forbearance in most cases, you have to share with your mortgage servicer evidence of hardship. In some instances, like the one we’ll discuss below, these rules are modified. However, in general, the following rules apply:
Your servicer will have you fill out an application for assistance. As part of that application, you may be asked to provide documentation around income and assets and any bills or other expense evidence. You’ll also be given the opportunity to describe the nature of the hardship and the need for help.
If you’re experiencing financial trouble, your servicer will want to do everything they can to help keep you in your home.
COVID-19 And Mortgage Forbearances
With COVID-19, the situation affected a broad swath of the population. Given that, it posed challenges for policymakers. Under the CARES Act, those who were impacted by COVID-19 can request mortgage assistance in the form of up to a year of mortgage payment forbearance in 6-month increments.
In order to qualify, you need to attest that you’ve been impacted by COVID-19. As an example, this could be the result of a work stoppage, getting the virus or lost income as a result of having to care for someone with the illness.
The initial forbearance period from Rocket Mortgage® will be 3 months. Before that timeframe expires, we’ll check in with you and see if you need to continue. We’ll repeat that process every 3 months throughout the year. You can also contact us yourself at any time if you’re ready to exit forbearance and resume your payment. At that point, we can discuss your repayment options.
Finally, given the uncertainty with the economy and this situation, some people have chosen to file for forbearance without knowing whether they were going to need it. If you took forbearance from your servicer, but continued to make your payment, you’re considered current and it has no impact on future mortgage qualification.
Can Forbearances Or Deferments Hurt Your Credit?
A deferment is a payment option once you exit the forbearance. The thing that has the potential to affect your credit is the act of getting approved for the forbearance itself. However, whether a forbearance affects your credit and how your credit is impacted depends on your situation and the type of forbearance you’re approved for. The best thing to do is to talk to your servicer.
For Rocket Mortgage® clients looking into their options, you can get started online.
Beyond the actual impact on your credit score, you should be aware that having a forbearance in your past, whether or not it’s already been resolved may or may not lead to waiting periods before you can apply for certain types of loans to purchase or refinance a home.
Again, if you’ve accepted a forbearance as a result of COVID-19, but you’ve continued to make your regularly scheduled payments, you’re not considered to have been on a forbearance by major mortgage investors, which should give you more flexibility.
Which Option Is Best For You?
Since deferment is one possible outcome at the end of a forbearance, the real question is not whether deferment or forbearance is best for you, but rather which repayment options are available. Your servicer will determine what you qualify for in terms of repayment alternatives.
The Bottom Line
Forbearance is when you work with your mortgage servicer to temporarily pause your monthly mortgage payments. Servicers typically do this in response to a financial hardship, such as job loss or an unexpected medical event. Typically, they’ll request documentation surrounding income, assets and expenses. Notably, requests related to COVID-19 are somewhat expedited.
A deferment is one possible option for repayment of past-due amounts when exiting forbearance. Some number of payments is set aside to be paid off at the end of the loan. Other forbearance repayment options include a repayment plan, modification or paying off the full amount that’s due immediately if that becomes financially practical.
There are various types of forbearance with different effects on credit and your future mortgage qualification ability. In talking about both the forbearance itself and your repayment options, the best thing to do is speak with your servicer.
Are you a Rocket Mortgage® client concerned about making your mortgage payment? Check out our assistance resources online.
As with any major financial decision, it’s best to speak with a financial advisor about your situation before moving forward with forbearance.
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