Shining a Light on Forbearance vs. Deferment
Sometimes circumstances beyond your control can lead to tough financial situations.
Your house is often one of your biggest — if not the biggest — of your assets. You need to make sure you’re taking the proper steps to preserve your investment even if you are unable to pay your mortgage in full at the moment.
Mortgage companies are often willing to work with you by delaying or deferring payments until you can get your feet back under you and catch up on your balance.
Forbearance vs. Deferment
There are many reasons that you could be struggling to keep up with your mortgage payments, such as the unexpected loss of a job, sudden illness, or loss of a partner. Whatever the circumstances that have led you to this situation, if selling your current home is not feasible, there may be other options when it comes to paying your mortgage.
You will need to reach out to your mortgage company to see what options they have available for you. Depending on the reason for your current financial difficulties and the length of time you expect them to last, your mortgage company may be able to provide several options.
A few of these options include forbearance, deferment, refinancings, and lowered interest rates. Each bank has its own policies and procedures for a mortgage modification, but they will be able to walk you through your options if you reach out to them.
If you need a total break from making your mortgage payments, you’ll need to request either forbearance or deferment. Each of these options has benefits and negatives associated with it.
Mortgage Payment Forbearance
When your loan goes into forbearance, you are no longer required to make payments. However, interest will continue to accrue on your outstanding balance. Because you are not making any payments and interest is continuing to accrue, your balance will grow.
Forbearance is generally granted for a set period of time. After the end of your forbearance period, if you are still unable to make payments, you will face a larger outstanding balance than you started the period with.
Additionally, forbearance is only available for limited circumstances such as medical emergencies, financial hardships, or natural disasters.
Forbearance also preserves your credit since the mortgage company has agreed to let you skip the payments.
Mortgage Payment Deferment
Like forbearance, deferment grants you a period of time where you do not have to make your mortgage payment. Unlike forbearance, when your loan is in deferment, it will not accrue interest. This means that the outstanding balance is frozen based on what it was when you entered into mortgage payment deferral.
Both forbearance and deferment eventually require you to make up for any payments that you have missed. Depending on your bank, they may require you to make a balloon payment at the end of the deferment period, or they may tack on the missed payments to the end of the loan. Tacking on the payments to the end of the loan extends the time before your mortgage is paid off.
A balloon payment generally is equal to the amount of any missed payments plus any accrued interest, if applicable.
Before agreeing to either forbearance or deferment, you should assess your current financial situation and determine what your finances will be like at the end of the deferment or forbearance period. Financial counselors can also help you decide which one of these options will be best for you and your family.
Steps to Obtaining Forbearance or Deferment of Your Mortgage
Assess your current financial situation.
You will need to understand your income, expenses, and assets available to pay your mortgage. Your bank will likely request this information before granting any requests. They may also request pay stubs, tax returns, and other financial documents similar to the documentation you submitted when you initially obtained your mortgage.
Determine how much assistance you need.
After determining where you stand, you need to figure out how much assistance you will need with your mortgage. Do you need to skip entire payments or will you still be able to make partial payments? How long do you foresee needing assistance? Having these answers available will make it easier to state a specific request to your mortgage holder.
Reach out to your mortgage holder.
The financial institution that holds your mortgage has a vested interest in ensuring that you pay your mortgage. Because they want to make sure you pay the mortgage, they are often willing to assist in the short term. Start by calling the customer service number for your mortgage holder and discussing the situation with them. It’s important to be clear and respectful when explaining the situation.
Research government assistance programs.
In times of general hardship — such as the housing bubble of 2008 or the pandemic of 2020 — government programs have provided assistance to people who cannot pay their mortgage. The types of assistance available vary, depending on the economic climate and whether government entities back your loans. If your bank is unwilling or unable to assist you with your mortgage payments, you can research government assistance programs.
Look for alternative options.
If neither forbearance nor deference is the right option for you, you might want to consider a sale-leaseback program. In this scenario, you sell your home and rent it back from the new buyer. This means that you do not have to move and receive the equity from your home to pay rent and other expenses.
Companies such as EasyKnock offer this option for a wide range of homeowners. Because you are selling your home and the company will know that you have equity available, this is a good option for homeowners with lower credit scores.
You Have Options
Just because you may be having financial difficulties, it does not mean that you have to lose your home. There are several options available through your lender or other organizations that can help alleviate short-term financial troubles and provide assistance.
Whether you elect to enter into a loan forbearance or loan deferment arrangement, or choose to sell your home and lease it back from the new owner, there are many different ways to keep you and your family in your home.
Tom BurchnellProduct Marketing Director
Tom Burchnell, Director of Digital Product Marketing for EasyKnock, holds an MBA & BBA in Marketing from University of Georgia and has 6 years of experience in real estate and finance. In his previous work, he spent time working with one of the largest direct lenders in the SouthEast.