HOW DOES MORTGAGE DEFERMENT WORK?

Ever wonder, “how does mortgage deferment work?” With the coronavirus wreaking havoc across the global economy, you might understandably be considering mortgage deferment to help you make ends meet. Many people across the nation (and globe) are either out of jobs or have been forced to temporarily stay home while we all try to prevent the spread of the virus. This has put lots of folks in a financial bind. If you have a mortgage and are feeling nervous about not being able to make your monthly payment, a mortgage deferment might be a good option for you once you understand how it works and what to watch out for. Here’s everything you need to know. 

What is a mortgage deferment? 

A mortgage deferment is a suspension or lowering of your monthly payments on your mortgage designed to help borrowers get back on their feet financially. It’s when your lender allows you to lower your monthly payment on your mortgage or stop making payments for a specified period of time. You can ask your lender for a mortgage deferment if you are struggling to make your mortgage payment and are experiencing temporary financial hardship. 

How does mortgage deferment work? 

Mortgage deferment works like this: you proactively call up your lender when you are experiencing a financial hardship, ideally before your monthly payment is due. You explain your financial hardship to your lender and ask what options, such as mortgage deferment, are available to you. Based on this conversation (and a few other factors we’ll discuss later), your lender may agree to lower or suspend your monthly payments for an agreed period of time. Whatever amount is deferred will generally be tacked on as monthly payments at the end of the term of your mortgage. Sometimes, you and your lender may agree that whatever payments were deferred, you will pay back in a lump sum by a specified date. In addition, your lender may agree to a mortgage modification all together. 

When you apply for mortgage deferment, you will most likely have to prove financial hardship by providing your lender with bank and or income statements. Every lender will have their own set of policies and requirements to prove financial hardship so be sure you understand what they are seeking from you to get approved as quickly as possible. 

What are the pros and cons? 

Pros:

You get to stay in your home. 

You’ll avoid foreclosure on your home. 

Lower or suspends your monthly payment so you have time to fix your financial hardships

Cons:

You’ll have to make up for your missed payments at some point. 

Your mortgage may still be accruing interest (that you won’t be making payments on). 

Costs more in the long run. 

What to watch out for:

If you speak with your lender and they agree to suspend or lower your monthly payments on your mortgage, be sure to get those terms in writing before you stop making payments. This is known as a forbearance agreement. It should include everything you and your lender have agreed on during the forbearance period, including how and when your make up payments will be made. It should also include language that the lender will not seek a foreclosure on your home during this period. 

Many mortgage terms allow lender’s to accelerate payments on your mortgage when you miss a payment. If you don’t have the deferment in writing, it will be your word against your lender’s should a dispute arise. This unfortunate scenario occurred frequently during the 2008 recession. Homeowners were alleging their lenders allowed them to defer payments and the lenders alleged that the homeowners simply failed to make payments. So definitely get it in writing and make sure you understand the terms of the deferment before you stop making payments. The last thing you want is to lose your home in a foreclosure. 

To recap, here is a minimum of what should be included in your forbearance agreement:

the length of the forbearance period

the new reduced payment amount or it should state that payment has been suspended 

the terms of repayment (i.e. whether you’ll pay back in one lump sum or whether it’s tacked on in monthly payments at the end of your mortgage). 

Who should seek out mortgage deferment

The best candidates for mortgage deferment are people who are experiencing a temporary financial crisis. If you aren’t sure if your financial hardship is temporary or the lender suspects that your financial hardships are more long lasting, mortgage deferment is probably not the best option for you since it is really just a quick temporary fix. 

[Related: How to Sell a House Fast]

Financial hardships can be scary and overwhelming. Having a mortgage hanging over your head can be really intimidating in times like these. Just know that if your situation is temporary such as a job loss or something unexpected like the coronavirus, your lender will likely be willing to help out. If this post helped you understand “how does a mortgage deferment work” make sure you share it with someone who it could help. 

If you are experiencing a financial hardship, make you sure take a look at our posts on reducing spending here. You may also find our debt help posts helpful as well as how to increase your income. 

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