The Federal Cares Act allows you to delay mortgage payments for up to 6 months if you’re suffering financially due to the COVID-19 pandemic. Pausing mortgage payments can provide some relief for people who have lost work during these times. However, there’s a lot of confusion about how you’re supposed to make those payments.
The Federal Housing Finance Agency has announced that Fannie Mae and Freddie Mac are making available a new payment deferral option. This allows borrowers who are in forbearance the ability to repay their missed payments at the time the home is sold, refinanced, or at maturity.
What is Forbearance?
Forbearance is a special agreement between the lender and the borrower to delay mortgage payments. When mortgage borrowers cannot meet their repayment terms, lenders can opt to foreclose on the property. A forbearance allows the borrower to miss scheduled mortgage payments for a specific period (usually between 4-12 months). This allows a borrower to avoid a potential foreclosure for missing mortgage payments and repay those missed payments at the conclusion of the forbearance period. In compliance with the CARES Act, government-sponsored mortgage loans qualify for forbearance plans.
A forbearance requires the skipped payments to be repaid upon expiration of the forbearance period, usually between 4 and 12 months after the forbearance was granted.
What is a Mortgage Deferral?
A mortgage deferral is an agreement between the Debtor and Lender to suspend mortgage payments for an agreed-on, temporary amount of time. Once a deferral ends, your mortgage payments go back to normal and the missed payments are often added to the end of the mortgage note, either by extending the maturity date of the mortgage or adding a balloon payment at the maturity date.
What is the Difference between Forbearance and Deferral?
The difference between a forbearance and a deferral comes down to when the missed payments are repaid. With a forbearance the missed payments are due upon expiration of the forbearance period, usually between 4-12 months, i.e. if you missed $5,000.00 in mortgage payments that $5,000.00 would be due to your lender 5-13 months after the forbearance was agreed upon. With a deferral, the missed payments are added to the end of the note either through the extension of the maturity date, the date your last mortgage payment is due or with a balloon payment equal to the missed payments plus interest at the maturity date of the loan, i.e. if you missed $5,000.00 in payments that $5,000.00 would be due either by paying your regular mortgage payment for a few months past maturity or with a balloon payment that is due upon maturity of the loan.
A mortgage payment deferral can be helpful when you are facing financial hardships due to COVID-19.
What’s more convenient for you?
A deferral is different and most likely more advantageous to those seeking help from their mortgage company during this time. The deferral takes the skipped payments and either extend the term of the note or adds a balloon payment to the end of the note. This means the skipped payments are repaid much further down the road when a Debtor is more likely to have recovered and does not require a large lump sum payment in a few months as a forbearance would.
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