Forbearance, Deferment & Modifications: These terms are generally thought of as interchangeable and are casually accepted by homeowners in financial crisis as “the Answer” to their hardships; however, it is critical to understand the differences in these ideas to avoid bigger trouble down the road.
A forbearance is a temporary hold on all late fees, credit reporting and payment obligations by your lender. At the end of the forbearance period you must repay all the payments skipped immediately or work out another solution with your lender.
Forbearances are only viable for people who expect to have a lump sum of money available once the forbearance period ends. If you do not have the money, your lender may be able to commence a foreclosure proceeding against you.
Borrowers with Federally backed mortgages (Fannie Mae and Freddie Mac) are eligible for forbearances under the CARES Act. Your lender does not need any paperwork from you to grant you a forbearance. Merely call your lender and tell them, “I am experiencing a financial hardship due to the COVID-19 emergency and need assistance.”
Example: Lender gives a 3 month (90-day) forbearance, on the 91st day all money due in those 3 months must be paid, in addition to the current month’s payment.
A deferment is a permanent delay on payments over a certain period of time. No other terms of the mortgage will change. Typically mortgage payments that have been deferred will be added to the end of the loan term without penalty.
Each mortgage company sets their own terms on deferrals. A deferral is not a right, nor is it automatic. Your mortgage company will generally require a financial application to qualify you for a deferral.
Example: Borrower is unemployed due to the COVID pandemic and knows that she will not be able to pay the mortgage for the next 3 months. She has exactly 5 years remaining before her mortgage is paid off. She asks for, and is granted a deferment by her mortgage company. The missed payments are moved to the back of the loan and she must now pay the mortgage for 5 years + 3 months.
A loan modification is a permanent change to one or more terms of your mortgage. A mortgage modification may change the interest rate, monthly payment, and term of your existing mortgage.
Loan modifications are completely within the discretion of your lender and often require significant financial documentation and demonstration of a particular hardship. Usually a series of “trial payments” must be made successfully before a loan modification offer becomes permanent.
There is no requirement that your bank must give you a loan modification. Your chances of obtaining a loan modification are significantly increased while in a Chapter 13 bankruptcy and with the help of the Barbaruolo Law Firm.