“A man is but the product of his thoughts; what he thinks, he becomes.” – Gahandi
How Does a Mortgage Deferral Work?
Mortgage deferrals can be a lifeline for homeowners facing financial strain, providing temporary relief when managing payments is challenging. Understanding how a mortgage deferral works, when to consider it, and its impact on your long-term financial health can help you make informed decisions about your mortgage.
What is a Mortgage Deferral?
How Does a Mortgage Deferral Work?
When you defer your mortgage payments, your lender agrees to take your past P&I payments and put them as a separate lien against your home. The key things to know about this process include:
Eligibility Requirements:
- Mortgage loan must be equal to or greater than 2 months delinquent or less than or equal to 6 months delinquent at the time the servicer evaluates you.
- Hardship (the reason why you fell behind ) must be resolved.
- Must be able to continue making the full mortgage loan payment, including any escrow shortage, over a term of 60 months.
- Is unable to reinstate the mortgage loan or a repayment plan to cure the delinquency.
- The mortgage loan must be a first lien conventional loan.
- Mortgage loan must be originated at least 12 months before your evaluation with your servicer.
Credit Impact: Most lenders report deferrals as “in good standing,” meaning that they shouldn’t negatively affect your credit score. However, it’s essential to confirm this with your lender before accepting a deferral offer.
Pros and Cons of a Mortgage Deferral
Understanding both the benefits and potential drawbacks of mortgage deferral will help you decide if it’s the right choice for your financial situation.
Pros:
Immediate Relief: By deferring payments, you can free up cash flow for other expenses or emergencies.
Avoid Foreclosure: A deferral can prevent late fees and the risk of foreclosure, helping you protect your home.
Your late fees will be waived.
***Any existing non-interest-bearing balance on the mortgage loan will remain due and payable at the maturity of the loan. It may also become due earlier in the event of a sale or transfer of the property, a refinance of the mortgage loan, or when the interest-bearing unpaid principal balance (UPB) is paid off. It’s important to keep this in mind as you manage your mortgage, as these conditions will apply throughout the life of the loan.
Cons:
A mortgage loan may have multiple deferrals over time, but the total amount of past-due principal and interest payments cannot exceed 12 months over the life of the loan.
Additionally, there cannot be more than one deferral within any 12 month period. This ensures that deferrals are used responsibly and not relied upon too frequently.
The mortgage loan also cannot be within 36 months of its maturity date when requesting a deferral.
***Another key consideration is that the borrower must not have failed a non-disaster-related mortgage loan modification Trial Period Plan within 12 months of being evaluated for eligibility for a payment deferral. This requirement ensures that borrowers are in a stable position before being considered for additional deferral options.
The application process varies by lender but generally involves these steps:
Contact Your Lender: Call your mortgage provider to explain your situation and request information on their deferral options.
Provide Documentation: Lenders often require proof of financial hardship, such as job loss verification, medical bills, or income reduction records.
Understand the Terms: Review the specific terms offered, including how interest accrues, repayment options, and how it might impact your loan.
Get it in Writing: Ensure all agreements are documented in writing, including assurances that your credit score will not be impacted.
When Should You Consider a Mortgage Deferral?
Consider a mortgage deferral if :
Temporary Income Loss: Situations such as a job layoff or reduced work hours.
Medical Emergencies: Unexpected medical expenses that strain your finances.
Natural Disasters: If you’re in an area affected by natural disasters and need time to recover financially.
Alternatives to Mortgage Deferral
If you’re unable to secure a deferral or feel it’s not the best choice, consider other options:
Loan Modification: Some lenders may adjust the terms of your mortgage to make payments more manageable.
Government Assistance Programs: Explore federal or state programs that help with mortgage payments during crises. Call your local city to see if they have any funds to help homeowners who have fallen behind on their mortgage payments.
Final Thoughts
A mortgage deferral can provide crucial relief, helping you weather financial storms. However, it’s essential to weigh the long-term costs and have a clear repayment plan. If you’re uncertain, consider seeking advice. Click here to schedule a 15-minute call with me to determine the best options for your situation.
By understanding how a mortgage deferral works, you can make an informed decision that protects both your home and your financial future.
