Mortgage Loan Forbearance and Deferment: What Homeowners Need to Know

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**Mortgage Loan Forbearance and Deferment: What Homeowners Need to Know**

When financial hardship strikes, as it often does, sometimes due to a job loss, a medical emergency, or a global event such as the COVID-19 pandemic, homeowners might find themselves struggling to keep up with their mortgage payments. Fortunately, during such times, there could be a lifeline available in the form of mortgage forbearance or deferment. Understanding these options is crucial for any homeowner who might be facing financial uncertainty.

### What is Mortgage Loan Forbearance?

Mortgage loan forbearance is an agreement between the lender and the borrower to temporarily suspend or reduce mortgage payments. This relief option is particularly relevant in times of unforeseen circumstances that impact a borrower’s ability to make regular payments. It’s important to understand that forbearance does not erase what the borrower owes. Instead, it provides temporary relief, granting the homeowner time to get back on their feet.

During the forbearance period, interest on the loan continues to accrue. Once the forbearance period ends, the homeowner will have to repay the missed amount, including the accrued interest. This repayment could be in the form of one lump sum, an extension at the end of the mortgage term, or by an increased monthly payment amount for a certain period until the skipped payments are made up.

### What is Mortgage Loan Deferment?

Mortgage loan deferment is another type of relief that allows borrowers to delay payments for a certain period. Unlike forbearance, deferment may allow delayed payments to be repaid over time or tacked onto the end of the loan, effectively extending the loan term. Interest may or may not continue to accrue during the deferment period, depending on the specific terms set by the lender. It’s designed to alleviate immediate financial stress with the understanding that the homeowner will pay back the deferred amounts in the future.

### How Do They Work?

When a homeowner realizes they are unable to make their mortgage payments, one of their first steps should be to contact their loan servicer to discuss available options, which may include forbearance or deferment.

**Forbearance**: If granted, the borrower and the lender agree upon the duration of the forbearance period and the repayment terms. A common forbearance option due to COVID-19 has been a 180-day forbearance with an option to request an additional 180 days.

**Deferment**: If a deferment is agreed upon, the homeowner and the lender will discuss how the repayment will work. Unlike a forbearance where increased monthly payments are common, a deferment might result in the missed payments being added to the end of the mortgage.

### Qualifications and Application

Qualifying for either a forbearance or deferment typically requires the homeowner to provide evidence of financial hardship. The application process will include a review of the homeowner’s financial situation, negotiation on the terms of the forbearance or deferment, and written agreement to the plan.

Forbearance plans were widely made available during the COVID-19 pandemic under the CARES Act for those with federally backed mortgages. The Act allowed for an initial forbearance period of 180 days, which could be extended for an additional 180 days upon request. For deferment, borrowers would generally need to demonstrate that they can resume regular payments once the deferment period ends.

### What Should Homeowners Consider?

Before entering into a forbearance or deferment agreement with a lender, homeowners should understand the implications:

1. **Credit Score Impact**: A mortgage forbearance or deferment marked on a credit report might raise concerns from future lenders. However, under the CARES Act, if the borrower was current on payments when they requested forbearance, the lender must report the account as current.

2. **Long-term Financial Impacts**: Delaying payments can seem like a great relief in the short term, but it’s important to understand how it impacts the mortgage in the long run. Will the homeowner be able to afford higher payments in the future? What are the increased costs due to accruing interest?

3. **Other Options**: It’s wise to consider other forms of assistance that may be available, such as refinancing for a lower interest rate, mortgage modification programs, or assistance from state and local governments.

### Communicating with Your Lender

Clear communication with the lender is essential. By exploring all options and understanding the terms:

– Homeowners should ensure that they are clear on how missed payments will be repaid.
– It’s crucial to work with the loan servicer to understand the impact of the decision on their overall financial situation.
– Homeowners should ask the lender about any fees, penalties, or additional interest that may accrue.

### Conclusion

During a financial crisis, mortgage forbearance or deferment can provide the necessary breathing room for homeowners to regain financial stability without immediately losing their homes. However, it is not a one-size-fits-all solution, and the long-term consequences on the homeowner’s financial health must be carefully considered.

In summary, homeowners faced with hardship need to promptly assess their situation, communicate transparently with their lender, and carefully weigh the pros and cons of forbearance or deferment. These tools can be very helpful when managed correctly; however, they require a well-thought-out plan for how to manage the mortgage once normal payments resume.

As with any financial decision, it is advised to seek the guidance of a financial advisor or counselor to ensure that the chosen path aligns with the homeowner’s overall financial plan. With the right strategy and resources, forbearance and deferment can be leveraged to maintain homeownership and financial security through tough times.

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