Mortgage Loan Deferment vs. Forbearance: Understanding the Key Differences

When financial difficulties arise, homeowners may face the need to temporarily pause their mortgage payments. Two common options available are mortgage loan deferment and forbearance. While both can offer relief, they function differently and have distinct implications for your financial future. Understanding these differences is crucial for making informed decisions about managing your mortgage during challenging times.

What is Mortgage Loan Deferment?

Mortgage loan deferment is a temporary suspension of your mortgage payments, allowing you to skip payments for a specific period without facing penalties. This option is often used when you anticipate a short-term financial difficulty.

Key Features of Deferment:

• Deferral Period: During the deferment period, you are not required to make payments. However, interest may continue to accrue depending on your loan terms.
• Repayment Schedule: Once the deferment period ends, your loan term is extended by the length of the deferment. This means you will have additional payments added to your schedule.
• Eligibility: Generally, lenders require proof of financial hardship and may only grant deferment for specific reasons such as job loss, illness, or temporary financial setbacks.
• Impact on Credit: Deferment typically does not impact your credit score since it is considered a temporary relief rather than a default on payment.

What is Forbearance?

Forbearance involves an agreement between you and your lender to temporarily reduce or suspend your mortgage payments. Unlike deferment, forbearance is usually negotiated directly with your lender and may not automatically extend your loan term.

Key Features of Forbearance:

• Forbearance Agreement: You must work with your lender to agree on the terms of forbearance, including how long payments will be reduced or suspended and how missed payments will be handled.
• Repayment Options: After the forbearance period, you may need to pay back the missed payments in a lump sum or through a repayment plan. This can result in increased monthly payments or a balloon payment at the end of the forbearance period.
• Eligibility: Forbearance is often available for various reasons, including financial hardship, natural disasters, or personal emergencies. Lenders may require documentation to support your request.
• Impact on Credit: Like deferment, forbearance itself typically does not negatively impact your credit score if you adhere to the agreed terms. However, if you fail to follow the forbearance agreement, it could lead to negative credit consequences.

Comparing Deferment and Forbearance

1. Payment Suspension:

• Deferment: Payments are completely suspended for a period, but the loan term is extended by that period.
• Forbearance: Payments are reduced or suspended temporarily, but how you handle missed payments afterward can vary.

2. Loan Term Extension:

• Deferment: The loan term is automatically extended by the length of the deferment.
• Forbearance: The loan term is not automatically extended; you may need to negotiate repayment terms.

3. Impact on Repayment:

• Deferment: Payments are simply added to the end of your loan term, potentially increasing the total interest paid.
• Forbearance: You may face a lump sum payment or higher monthly payments once the forbearance period ends.

4. Credit Impact:

• Deferment: Generally does not affect your credit score if managed properly.
• Forbearance: Also generally does not affect your credit score if you follow the agreed terms.

5. Eligibility Criteria:

• Deferment: Often requires specific conditions like temporary financial hardship.
• Forbearance: May be granted for a broader range of circumstances and often involves negotiation with your lender.

Choosing the Right Option for You

Deciding between deferment and forbearance depends on your financial situation and the specifics of your mortgage agreement. Here are some considerations:

• Short-Term vs. Long-Term Relief: If you need short-term relief and expect to recover quickly, deferment might be suitable. For longer-term issues, forbearance could offer more flexible options.
• Ability to Repay: Assess whether you can manage higher payments after the deferment or forbearance period ends. Forbearance might involve a larger payment at the end, which could be challenging if not planned for.
• Communication with Lender: Always communicate openly with your lender. They can provide detailed information on how each option will impact your mortgage and credit score.

Example Scenarios

Scenario 1: Sarah's Short-Term Financial Setback

Sarah has recently lost her job and expects to return to work in three months. She applies for a mortgage loan deferment. During the deferment period, Sarah does not make any payments, but her loan term is extended by three months. Her mortgage payments will resume after the deferment period, and her total loan term is adjusted accordingly.

Scenario 2: John’s Natural Disaster Recovery

John's home was damaged in a natural disaster, affecting his ability to make mortgage payments. He negotiates a forbearance agreement with his lender, reducing his payments for six months. After the forbearance period, John is required to either make a lump sum payment or agree to a modified payment plan to catch up on missed payments.

Conclusion

Both mortgage loan deferment and forbearance offer valuable options for managing mortgage payments during financial difficulties. Understanding the differences between these options, including their impacts on your loan term, repayment structure, and credit score, is essential for making the best decision for your circumstances. Always consult with your lender and consider your long-term financial plans when choosing the right path to manage your mortgage effectively.