What Is Mortgage Deferral and How Does It Help Homeowners?

If you’re behind on your mortgage payments, a mortgage deferral could help you catch up on your home loan. If you qualify, a mortgage deferral lets you put your past-due payments at the end of your loan. Deferrals have their pros and cons and aren’t the best option for everyone. Keep reading to learn more about whether a mortgage deferral is right for you. We’ll also cover other mortgage-relief options.

Mortgage-Relief Options

A job loss, injury, or other emergency can make it hard to keep up with groceries, utilities, and mortgage payments. Mortgage forbearance and mortgage deferrals are two mortgage-relief options that help homeowners who are struggling with their mortgage payments because of temporary difficulties. Each can give you some relief and time to work out long-term solutions. 

Mortgage Forbearance

Mortgage forbearance is a deal with a lender to reduce or postpone payments for a certain period of time. While you won’t have to make payments during the forbearance period, interest on the loan will still accrue. Also, during the forbearance period, the lender won’t pursue foreclosure. 

A forbearance plan usually lasts for three to six months, but the CARES Act extended that time for federally backed loans. The CARES Act allows Freddie Mac, Fannie Mae, HUD/FHA, USDA, and VA mortgage borrowers to request a forbearance for up to 18 months. The forbearance plan usually starts with a three- to six-month period. After that, it can be renewed for up to 18 months. You can also find some general information on mortgage forbearance from the Consumer Financial Protection Bureau (CFPB).

If you need a forbearance, you must contact your mortgage servicer and ask for it. You can ask your mortgage servicer how long the forbearance period will last. The contact information for your servicer should be on your mortgage bill. Together you and the servicer will agree on a forbearance plan. You’ll have to look at your personal financial situation and then decide how you to repay the payments that are being postponed. 

There are usually four options for repayment after the end of your forbearance:

1. A lump-sum repayment where you make a one-time lump-sum payment when your forbearance period ends.

2. A payment plan where your monthly payment increases once your mortgage payments resume.

3. A loan modification, which means you modify your loan to extend it, get a new interest rate, or both. If you have a VA loan, you can extend your loan up to 30 years, as long as the extension is 10 years or less from the ending date (maturity date) of your loan.

4. A payment deferral, which allows you to tack on the deferred payments to the end of your loan. You’ll pay this when you sell or refinance your house. Freddie Mac, Fannie Mae, and other federally backed loans allow borrowers to make up the payments at the end of the loan or when the house is sold or refinanced. This does not extend the period of your loan, and you’ll have a chunk of money to pay at the end. You can always ask for a loan modification when the time comes to pay the deferred amount.

If you have a forbearance under the CARES Act,  your lender can’t legally force you to make a lump-sum payment for your deferred payments under the forbearance plan.  You have the right to make a repayment plan for your mortgage payments. If you have any complaints about how your mortgage servicer is handling a forbearance or about your payment options, you can make a formal complaint with the CFPB or talk to an attorney to help you manage your home mortgage.

Mortgage Deferral

Mortgage forbearance is a proactive measure you take before you get behind on your payments. If you’re already behind, you can ask for a mortgage deferral. Deferrals are good to use if you have a temporary hardship, such as getting laid off for a couple of months, but you know you’ll be able to resume making your mortgage payments after the hardship is over. Deferrals are better than forbearances for people who know they can’t make a lump-sum payment to pay off their missed payments during a forbearance. A mortgage payment deferral allows you to take those missed payments and put them at the end of your mortgage term to make your loan current.

Payment Forbearance and Deferral During COVID-19

The coronavirus pandemic has made it difficult for millions of homeowners to make their regular monthly mortgage payments because of unemployment, sickness, and changes in caretaking responsibilities. Throughout part of 2020 and 2021, over 9 million Americans participated in a mortgage forbearance. If you’ve fallen behind on your mortgage payments, a federal or state mortgage relief program could help you.

COVID-19 and Mortgage Forbearance

The CARES Act is a federal program that provides forbearance options for Americans with government-backed mortgages, such as Freddie Mac, Fannie Mae, HUD/FHA, USDA, and VA mortgages. The forbearance option does have a catch — your request for forbearance must be because you’re facing financial hardship due to COVID-19, either directly or indirectly. Don’t hesitate to use the CARES Act safety net. It might be the difference between staying in your home or facing foreclosure and getting evicted.

There is currently no deadline for the initial forbearance request for assistance with a Fannie Mae or Freddie Mac government-backed mortgage. If you have a HUD/FHA, USDA, or VA direct loan, you can request a forbearance under the CARES Act until the COVID-19 national emergency officially ends. Previously, there was a September 30, 2021, deadline for direct federal loans, but that changed on September 27, 2021.

COVID-19 and Mortgage Deferment

The COVID-19 pandemic lasted longer than industry leaders thought it would. The foreclosure safety net was one step to help homeowners, but more help was needed. Some people could eventually get back to work when restrictions were lifted, but they couldn’t come up with a lump sum to pay theIR postponed mortgage payments.

For homeowners that couldn’t pay a lump sum or make a repayment plan, Fannie Mae and Freddie Mac began offering a COVID-19 mortgage deferment option. Fannie Mae started its deferment program in May of 2020 and Freddie Mac started its program in July of 2020. A COVID-19 mortgage deferment allows you to tack on your past-due payment amount to the end of your loan term. But you’ll also have to pay back the amount if you sell or refinance your home before your loan term ends.

There are eligibility requirements for pandemic-related deferments. To qualify, your financial hardship must be related to COVID-19, and the loan must have been current before March 1, 2020. You must have also recovered from your COVID-19 setback. For instance, if you were laid off, you must be back to work. You’ll have to show that you can make the payments. A mortgage deferral can be used after a forbearance, and Fannie Mae and Freddie Mac allow 18 months of past-due mortgage payments to be deferred due to coronavirus-related events.

Let's Summarize...

A mortgage deferral allows borrowers to move past-due house payments to the end of their loan term. It makes the home loan current immediately without requiring the homeowner to make a lump-sum payment on the past-due amounts. A mortgage deferral can also help homeowners who’ve used forbearance to deal with a temporary hardship. Mortgage forbearances allow homeowners to temporarily stop making payments, though interest keeps occurring. At the end of the forbearance period, there are four ways to make up the past-due amount. 

If you’re struggling to make your house payments, contact your mortgage servicer to see what options you have. In addition to the usual options, many special options remain in place due to COVID-19.