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COVID-19 Pandemic: Mortgage Deferment vs. Forbearance
Tommy
I realize that this post is late for most people, but I wanted to share it to raise awareness. This happened to one of my customers at work recently and I wanted to make sure it doesn’t happen to other people.
So at the beginning of the COVID-19 pandemic, most banks decided to offer mortgage relief to their customers as unemployment skyrocketed and people fell behind on their mortgages. The relief was offered in either mortgage deferment or mortgage forbearance. The terms are so similar that even bankers mistakenly use the terms wrong, but there is a BIG difference that ordinary people need to understand. So if you had mortgage relief during the COVID-19 pandemic then make sure you understand the difference and review what type of relief you received. If you check out this CNBC article, Bank of America ended up giving customers forbearance not deferment and one person paid the price of forbearance to keep their mortgage current as the banker used the terms incorrectly.
What is Mortgage Deferment?
Mortgage deferment is when your mortgage payments are deferred to the end of your loan term (at the maturity date or the end of the amortization schedule). Fannie Mae, Freddie Mac, the FHA, and USDA actually offer mortgage deferment for all mortgages under the COVID-19 pandemic. Deferment is the mortgage relief option that you want as it keeps your mortgage payments the same, you are not charged interest, and the payments will be added on to the end of your loan term.
Your payments should not be added to your loan balance. So if you check your monthly loan billing statement or pull a credit report for yourself, then your loan balance should remain the same every month and not increase. If the loan balance has increased then that means that you are accruing interest and that is how forbearance works.
You can pull your credit report for free from the 3 major credit bureaus (Experian, Transunion, and Equifax) once per year at Annual Credit Report.com. This is the only place that you can pull them for free and it’s authorized by federal law. Credit reports offered through other companies may be similar, but they are not official reports and they might not be free. I like to pull 1 credit report every 4 months to make sure there are no mistakes on my credit report.
What is Mortgage Forbearance?
Under the CARES Act passed by Congress, people who were affected by the COVID-19 pandemic can request forbearance in 6-month increments for up to a year. Per the Consumer Financial Protection Bureau (CFPB), mortgage forbearance is when your mortgage servicer allows you to temporarily pay your mortgage at a lower payment or pause your mortgage payments. Sounds great right? Under forbearance, you will have to pay the lower/paused monthly payments at a later date, typically at the end of the forbearance term and sometimes in a lump sum. But the CARES Act bans lenders to force consumers to repay lower/paused payments in a lump sum once the forbearance term ends if you received forbearance because of COVID-19 hardship.
Like I said above, a lot of people use the terms deferment and forbearance interchangeably, sometimes even wrong, and they are not the same. The problem with forbearance is that interest still accruals and your monthly payments may balloon at the end of the forbearance term. This happened to the individual in the CNBC article above.
This happened to one of my customers. I noticed on his credit report that his mortgage balance for his personal residence increased substantially year over year. I was like what happened? And it looks like that the monthly payments have been added to the mortgage balance and therefore accrues interest. So he will have to pay more interest in the long-term and I’m sure that was an unintended consequence.
How to fix mortgage forbearance and repayment options?
If you applied for mortgage relief due to the COVID-19 pandemic, then you need to figure out what kind of relief your received. Did you receive deferment or forbearance? I would look up your mortgage balance on your monthly statement and see if it has remained the same or if it increases every month. If your mortgage balance has inflated, then you probably received mortgage forbearance as interest still accruals under that type of mortgage relief. Then you will have to figure out exactly what the terms are by talking with your lender.
Some questions that you should figure out are the following:
- Once the forbearance term ends, will the monthly payments remain the same as before the pandemic began?
- When will the lowered/paused monthly payments become due?
- What options do I have to repay the lowered/paused monthly payments?
If you received forbearance and you are looking to resume normal payments. It might be best for you to pay off the lowered/paused monthly payments in a lump sum by using your savings. That’s what savings is for. This is because if your loan balance has inflated, then interest on the outstanding balance has accrued already. But if you pay in a lump sum, then you will cut your losses on interest already paid and you will resume normal payments as soon as possible, which is the end goal. I know that this isn’t possible for everyone, but I think it’s the best option. Other options your lender would provide are a repayment plan or a loan modification.
Bottom Line
Mortgage forbearance is when your lender temporarily lowers/pauses your mortgage payments for a specific period. This is typically done when the borrower has some sort of financial hardship like a job loss or a medical problem and cannot make payments. Payments are typically due on demand at the end of the forbearance term, your lender offers a repayment plan, or your lender modifies the loan.
Deferment is when a number of your mortgage payments are suspended and they are repaid at the end of your mortgage term (your maturity date). In my opinion, this is the better option of the two as your payments will stay the same and additional interest will not accrue.
Your credit score should not be affected under forbearance or deferment. Your payments should be reported as current and they shouldn’t be late. So it’s important for you to monitor your credit score/report and make sure it’s not affected. If it is wrong, then contact your lender and work with the credit bureaus to get your credit report corrected.
You need to figure out what options your lender offers and which option works best for you. This will be different for everyone. Again if you went with the forbearance option, then I think the best repayment option is to repay the lower/paused payments as soon as possible. Also, it’s best to speak with a financial advisor or make sure you know what you are getting into before you go with the forbearance option.
The CFPB offers a bunch of information and some of these links were used in this post. See below for more help: