Deferment vs Forbearance
If you are reading this, chances are you are feeling the squeeze that coronavirus has caught many Michiganders. With so many people out of work, many banks are scrambling to address the issues at hand. Currently, many advisors are suggesting that if you think you won’t be able to make your mortgage payment, to call your bank and ask them what options they have available to you. When talking to the bank, remember not all mortgage relief is created equally and you need to know and understand what terms you’re agreeing to.
I will say first that if there is any way possible for you to make your mortgage payment, do it. Before you decided to make a loan modification (change the terms of your existing loan) look and see if you can defer your car loan, credit cards, or student debt. That being said, if you are in need, here are several terms you may hear when you call your lender and ask for assistance on your loan payments. Postponing a loan sounds great, but being clear on what you're being offered is a necessity.
Deferment and forbearance cause a fair amount of confusion. The dictionary definitions of these two words are the postposing of a payment. The big difference is how these two loan modifications are handled after the term is up.
Deferment is a postponement of your monthly bill with the missed payments being added to the end of your loan or added to the future payments.
For example, if you owe a $1,000 payment every month for 30 months, the bank will allow you to skip 2 monthly payments but will then add another 2 payments on to your loan at the back end, giving you a 32-month loan length.
Forbearance is tricky because it is used to refer to several options. Forbearance is also a postposing of payment, with your repayment coming in one of several different ways.
- You may have to repay all your owed payments in a lump sum at the end of your forbearance know as a reinstatement.
- You can extend the term of your loan, meaning the missed payments will be added on to the end of your loan. For example, if you were given a twelve-month period where you didn’t have to pay your mortgage, you’d have twelve months of payments added on to the date when your loan was supposed to be paid off by.
Now here is where it gets tricky; some banks will interchange these two terms or even refer to a branded relief program name. So just because they call it a deferment doesn’t mean it is one, and you need to be clear on what you're agreeing to.
Now I am not a loan officer and mortgages are not my expertise, but here are some questions you need to ask when you are discussing options with postponing your loan payments:
- Will this increase the length of my loan?
- Will this increase the total amount I will pay at the end of my loan?
- Will there be any additional interest owed?
- Will there be any additional fees or charges?
- Will these missed payments be reported to the credit bureau or affect my credit in any way?
- Will this be held against me in the future refinance or new mortgages down the road?
Be aware that there are commonly late fees and other costs associated with any loan modification or payment restructure.
Whatever terms are agreed to, have them put in writing...
If it is not offered to you automatically. Go through the document carefully and make sure it has all of the terms that were explained to you. As my mentor always says, if it's not in black and white it doesn’t exist.
Another important concept to understand is that many people have an acceleration clause in their mortgage.
An acceleration clause is a contract provision that allows a lender to require a borrower to repay all of an outstanding loan if certain requirements are not met.
An acceleration clause outlines the reasons that the lender can demand loan repayment and the repayment required. This clause is super important to you now because, should you agree to a loan modification for a 90-day deferment or forbearance and then don’t make your appropriate payment on the 91st day, the bank will have the right to pull your mortgage and possibly make you lose your home.
Lastly, if there is a question you have or maybe you don’t know who you need to talk to but you just need some assistance, the team at KNE Realty is here to help, so don’t hesitate to reach out. If your questions aren’t in our wheelhouse, chances are we have a trusted professional we can connect you with. You are not alone and we will do our absolute best to get you the answers you need!
Loan Modification: A loan modification is different from refinancing your mortgage. Refinancing entails replacing your loan with a new mortgage, whereas a loan modification changes the terms of your existing loan.
Forbearance: Also a postponing of payment, with your repayment coming in one of several different ways.
Reinstatement: A lump sum payment due at the end of a postponement of payment
Deferment: A postponement of your monthly bill with the missed payments being added to the end of your loan or added to future payments.
Acceleration clause: a contract provision that allows a lender to require a borrower to repay all of an outstanding loan if certain requirements are not met.
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