If you’re struggling to keep up with your mortgage payments, there are several options available to help you get back on track and make monthly payments on time. Two common agreements you might consider: forbearance and procrastination. However, these two options will affect your mortgage loan, term, and payments differently.
By understanding how each arrangement works and how it must be repaid, you can make a more informed decision about which option is a better fit to meet your current short-term financial needs.
Mortgage Forbearance vs. Forbearance
Mortgage forbearance and forbearance are often misconstrued as interchangeable terms because there are only nuances between them, says Shmuel Shayowitz, president and chief lending officer at Approved Funding — a direct mortgage lender with over three decades of experience providing homeowner lending solutions.
Mortgage leniency is an agreement between a homeowner and lender to temporarily suspend or reduce mortgage payments. Missed payments must be repaid after the grace period ends, but homeowners have several repayment options available.
mortgage deferral is an agreement to defer overdue mortgage payments to the end of the loan term to pay them at a later date. “You can think of procrastination as like hitting the snooze button on an alarm clock,” says Shayowitz. The alarm clock rings anyway, only at a later time.
Mortgage forbearance and forbearance agreements give struggling homeowners time to lower or suspend their monthly payments while they get their finances back in order. Understanding how these two options work and the benefits of each will help you, the borrower, to make a more informed decision.
What is mortgage forbearance?
Forbearance is a three to six month pause or reduction in your monthly mortgage payment without the risk of your home being foreclosed on. After the grace period has expired, you will be responsible for repaying any missed or reduced payments.
Forbearance gives homeowners time to deal with temporary financial difficulties that may be preventing you from making your mortgage payments — such as
This is how mortgage rebate works
If you find you can’t make your monthly payments on time, you should contact your mortgage lender to discuss payment options, Shayowitz says. Depending on your individual situation, you may be able to pause or reduce your current payments, but interest will continue to accrue on unpaid balances during this time. Your lender may ask for proof of your financial hardship.
After the deferral period expires, you will resume your regular mortgage payments. In addition, you must repay any missed payments using one of these four payment methods.
- repayment plan. A small portion of the amount owed will be added to your regular monthly mortgage payments until it is paid off – this can take up to several months.
- Loan Modification. Your lender may agree to reduce your monthly payment to a more affordable amount and add missed payments back to the balance owed. This option can extend the life of your loan, so it should only be considered if you are unable to make your regular mortgage payment.
- reinstatement. If you have the funds, you may be able to repay your missed payments in one lump sum.
- reprieve. Your lender may agree to defer missed payments until the end of your loan if you can make your regular payments but cannot afford a larger payment.
Typically, mortgage forbearance agreements have a term of three to six months, depending on the borrower’s individual situation. But in 2020, the CARES Act gave borrowers affected by Covid-19 the option to extend their forbearance period by up to 18 months for eligible homeowners.
Mortgage loans aren’t the only type of loan that allow for forbearance — student loans, car loans, and personal loans offer this option for borrowers who are experiencing severe financial difficulties. Credit card payments may also offer forbearance agreements.
Pros and cons of mortgage forbearance
Mortgage forbearance can help homeowners avoid foreclosure on their mortgage during short-term economic downturns, which can have a significant negative impact on your credit score. Homeowners can continue to live in their home while they develop a plan to pay off their debt in the event of missed or reduced mortgage payments.
One potential downside: interest continues to accrue during a deferral period, which can increase your future monthly payments. If you’re already struggling to make your current payments, this option may not be the best choice. Forbearances are reported in your credit history, which may affect your ability to refinance your mortgage or qualify for new credit for a short period after the forbearance.
What is a mortgage forbearance?
Forbearance is a temporary suspension of your monthly mortgage payment, typically lasting three to six months. After the deferral period expires, your missed payments will be added to the end of the loan term to be paid at a later date — or sooner if the home is sold or transferred, or the loan is refinanced.
The deferral is often used to give a homeowner who is already behind on their payments time to catch up. To further help struggling homeowners, lenders are also pausing interest on these missed payments.
This is how mortgage deferral works
Mortgage forbearance is an option for homeowners who need help making up their overdue mortgage payments due to unforeseen financial difficulties. This can help you save money on late fees and avoid a missed payment affecting your credit history.
Your lender will then determine whether your situation qualifies for a deferral – and if so, they will provide the terms of the agreement, including the length of the deferral period and future due dates.
Once approved, all payments regularly scheduled during the period and overdue amounts are added to the end of the term of the loan to be repaid. During this period no interest will accrue on the amounts owed.
Mortgage deferrals typically take three to six months. However, homeowners affected by the Covid-19 pandemic were given an extension of up to 18 months. Aside from mortgages, other financial obligations offer deferred payments, including student loans, auto loans, personal loans, insurance, and credit card payments.
Pros and cons of procrastination
If your loan is deferred, any overdue payments will be added to the end of the loan term. Lenders agree to deferrals to help homeowners avoid foreclosure on their home and continue to face late payment fees that negatively impact your credit score. Usually, no interest accrues during the deferral, so the payments remain the same.
On the other hand, agreeing to a forbearance also means that you agree to continue paying your mortgage beyond your original term. Before you decide to defer your loan, you should carefully consider whether your current financial situation is short term and can be fixed before payments resume – otherwise you risk defaulting on your loan again.
How to choose between the two
When deciding whether to take out a forbearance or forbearance on your mortgage, you should consider both your current and future financial situation.
If your current financial setback is temporary, meaning it will be resolved in 90 days or less, you might be better off forgoing your loan. However, if you anticipate that your current situation will affect your ability to repay your missed payments on top of your regular mortgage payments, deferring your loan payments until the end of the loan term may be your best option.
Regardless of which option you choose, it’s important to be extremely transparent with your lender throughout the process so they can help you make informed decisions about your repayment strategy.
“[Lenders] work very hard to try and accommodate people who have difficulties and circumstances that prevent them from making payments,” says Shayowitz, “[Lenders] I don’t want to foreclose homeowners.”