What Is a Mortgage Deferment and How Does It Work?
Learn how mortgage deferment can help homeowners manage payments during hardship and its impact on their financial future.
A mortgage deferment offers a temporary financial adjustment for homeowners facing hardship. It involves an agreement with a mortgage servicer to postpone some mortgage payments. This allows homeowners to address financial difficulties without the immediate burden of regular mortgage obligations.
Understanding Mortgage Deferment
Mortgage deferment allows homeowners to move past-due mortgage payments to the end of their loan term. This makes the loan current without requiring an immediate lump-sum payment. The deferred payments, including principal and interest, are added to the outstanding loan balance, becoming due at the loan’s maturity, property sale, or refinancing. Interest generally does not accrue on these deferred principal amounts.
Mortgage deferment differs from mortgage forbearance, though the terms are sometimes used interchangeably. Forbearance is a temporary agreement to reduce or postpone mortgage payments for a set period, often three to six months. During forbearance, interest typically continues to accrue on the unpaid balance, which can increase the overall loan amount. At the conclusion of forbearance, homeowners typically face repayment options like a lump-sum payment, a repayment plan, or a loan modification.
In contrast, deferment is often an option provided after forbearance, or directly if missed payment criteria are met. While forbearance pauses or reduces payments, deferment addresses how missed payments are handled by pushing their due date to the loan’s conclusion. Forbearance is generally a proactive measure before falling behind, while deferment can be used when a borrower is already delinquent. The primary distinction lies in how missed payments are ultimately repaid, with deferment avoiding immediate repayment obligations.
Eligibility and Lender Considerations
Lenders require evidence of a verifiable, temporary financial hardship for deferment eligibility. This hardship could stem from job loss, significant illness, or a natural disaster. Clear documentation substantiating the cause and expected duration of the hardship is generally a prerequisite.
Loan type also influences eligibility, with options varying for conventional loans versus those backed by government agencies like the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). Lenders review payment history; some programs require a loan to be delinquent by a specific number of months, often two to six, but not exceed a maximum.
When evaluating a deferment request, lenders typically ask for specific financial information and supporting documents to understand your financial situation. These often include:
Recent pay stubs or proof of income reduction
Bank statements for the past two to three months
Current profit and loss statements for self-employed individuals
A hardship letter explaining the circumstances
A copy of the most recent mortgage statement
Forms like IRS Form 4506-T
Applying for Deferment and Repayment Options
Initiating a mortgage deferment typically begins with contacting your mortgage servicer as soon as a financial hardship arises or is anticipated. This direct communication is crucial to discuss available relief options. The servicer will guide you through the formal application process, which involves completing specific forms.
Provide necessary documentation during this process, which helps the servicer assess the situation and determine eligibility. After submitting the application and supporting documents, await approval from the servicer. Once an agreement is reached, request written confirmation of the deferment terms.
Deferred mortgage payments are typically repaid in various ways. One method is a lump-sum payment of the deferred amount, due at the end of the loan term, property sale, or refinancing. Many government-backed loans, such as those from Fannie Mae or Freddie Mac, generally do not require a lump-sum repayment at the end of a deferment.
Alternatively, deferred payments can be added to the end of the original loan term, extending the repayment period. For some government-backed loans, a partial claim option places missed payments into a subordinate lien, repaid when the home is sold or refinanced. For long-term financial challenges, a loan modification might restructure loan terms, such as extending the term, lowering the interest rate, or adding missed payments to the principal balance.
When properly arranged, a mortgage deferment typically does not directly harm a borrower’s credit score. Lenders generally report the deferred status to credit bureaus, which usually does not result in a negative impact. However, missed payments before the agreement or failure to adhere to deferment terms can adversely affect credit. A managed deferment is generally less damaging than missed payments or foreclosure.