Is It Bad to Defer a Mortgage Payment?

Homeowners facing unexpected financial challenges, such as job loss, a medical emergency, or a natural disaster, may struggle with mortgage payments. Understanding available options is important for maintaining homeownership. Mortgage deferral is one option for temporary financial hardship. This article explains mortgage deferral and its considerations.

Understanding Mortgage Deferral

Mortgage deferral is a temporary pause or reduction in mortgage payments, offered by lenders during financial hardship. During an approved deferral period, homeowners are not required to make usual monthly payments for a specified duration, often a few months to a year. This relief provides breathing room to address financial issues.

While payments are paused, interest on the outstanding loan balance continues to accrue. The total amount owed can increase even when no payments are made. The deferred principal and accrued interest must be repaid later; deferral postpones payments, it does not forgive debt.

Homeowners consider deferral due to financial setbacks like job loss, medical expenses, or natural disasters. It offers a short-term solution, allowing homeowners to stabilize their finances before resuming payments.

Initiating a Deferral Request

To request a mortgage deferral, contact your mortgage servicer. Most servicers have dedicated hardship departments or online portals. Initiate communication promptly when financial difficulties arise, before missing payments.

The servicer will require documentation to process a deferral request. This includes proof of income (pay stubs, unemployment statements), bank statements, tax returns, and a hardship letter explaining the circumstances.

After submitting documents, the servicer reviews the application for eligibility based on their guidelines. Homeowners should anticipate follow-up questions to clarify information or request additional documentation. Maintaining clear communication throughout this process ensures a smooth review and decision.

Financial Outcomes of Deferral

After deferral, servicers handle accumulated deferred payments in several ways. One is a lump sum payment, where the entire deferred amount is due immediately. This can be challenging if the homeowner has not recovered financially.

A payment plan spreads the deferred amount over a specific period, typically six to twelve months, added to regular monthly payments. This increases future payments until the amount is repaid, with the increase depending on the total deferred amount and plan length.

Some servicers offer a loan modification, adding the deferred amount to the principal balance. This results in a larger outstanding loan, and terms like interest rate or term length may adjust for a new monthly payment. While manageable, it often increases total interest paid over the loan’s life.

A loan maturity extension extends the original loan term by the number of deferred months. For example, a 30-year mortgage with six deferred payments becomes 30 years and six months. This pushes back the payoff date and can increase total interest paid. An approved deferral should not negatively impact credit scores, as payments are considered current.

Exploring Alternative Assistance

Homeowners facing financial difficulty have other options. Forbearance, often used interchangeably with deferral, is a temporary payment suspension or reduction with varying repayment terms, such as a lump sum or structured plan. Repayment terms can vary significantly between servicers and programs.

A loan modification permanently changes mortgage terms for more affordable payments. This may involve lowering the interest rate, extending the loan term, or reducing the principal balance. Unlike deferral, a modification aims for a long-term affordability solution.

Refinancing involves securing a new loan with a lower interest rate or longer term to reduce monthly payments. This option requires a stable financial situation and sufficient home equity. Refinancing also involves closing costs.

If long-term mortgage obligations are unsustainable, selling the home can avoid foreclosure, allowing homeowners to recover equity. Non-profit credit or housing counseling agencies also offer personalized advice, helping homeowners understand options and communicate with their servicer.