A deferred balance on a mortgage is the total of payments your lender set aside during a forbearance period so you didn’t have to repay them right away. It sits as a separate, usually non-interest-bearing amount attached to your loan, and it becomes due when you sell the home, refinance, pay the loan off, or reach the end of your term. Your regular mortgage keeps running on its original schedule; the deferred piece just waits.
Deferred balances became common during the COVID-19 pandemic, when federal forbearance programs let homeowners with government-backed loans pause payments for up to 360 days. The balance never disappears on its own. How it gets handled depends on who backs your loan, how much equity you have, and what you do with the property next.
What’s Actually in the Balance
A deferred balance is more than the principal and interest you skipped. It typically bundles three things:
- Principal and interest: The scheduled monthly amounts you would have paid during the forbearance window.
- Escrow advances: Property taxes and homeowners insurance kept coming due while payments were paused. Your servicer paid them on your behalf, creating a deficit in your escrow account that gets folded into the deferred total.
- Servicing advances: Certain administrative costs the servicer paid to third parties during the delinquency may also be rolled in, depending on the loan program and state law.
The deferred balance is tracked as a separate entry from your remaining loan principal, and in most programs it does not generate its own interest while it sits. Your original loan principal, though, continued to accrue interest at your note rate throughout the forbearance period. The loan did not freeze just because payments paused.
How the Deferral Is Structured by Loan Type
Each agency uses its own program name and its own rules on how much can be deferred and when it comes due. The first thing to find out is who backs your mortgage.
FHA Partial Claim
HUD places your past-due amounts into an interest-free subordinate lien against your property called a partial claim. You make no monthly payments on it. The full amount becomes due only when you make your last mortgage payment, sell the home, refinance, or transfer title.1U.S. Department of Housing and Urban Development (HUD). FHA’s Loss Mitigation Program FHA also offers a combination option pairing a partial claim with a modification that can extend the loan term up to 480 months and adjust the interest rate.2Federal Register. Increased Forty-Year Term for Loan Modifications
VA Partial Claim
VA-guaranteed loans use the same partial claim structure: a subordinate loan with no interest and no required monthly payments. Full repayment is required when the veteran transfers title, pays off the loan, or refinances.3Veterans Benefits Administration. Circular 26-25-9 – Procedure for the Collection of Partial Claim Funds
Fannie Mae and Freddie Mac Payment Deferral
Conventional loans backed by Fannie Mae or Freddie Mac use a “payment deferral.” The servicer moves past-due principal, interest, and escrow advances into a non-interest-bearing balance that comes due at maturity, or earlier if you sell, transfer the property, refinance, or pay off the loan. No more than 12 months of cumulative past-due principal and interest payments can be deferred over the life of the loan, and each individual deferral covers between two and six months of missed payments.4Fannie Mae. Payment Deferral Your interest rate, remaining term, and regular monthly payment all stay the same.
USDA Mortgage Recovery Advance
USDA-backed loans offer a Mortgage Recovery Advance, capped at 30 percent of the unpaid principal balance at the time of default. It’s non-interest-bearing, and nothing is due until the mortgage matures, the borrower sells or transfers the property, or the loan is paid off. Unlike the other programs, the USDA option extends the loan term alongside the deferral, so there is no balloon payment at the original maturity date.5U.S. Department of Agriculture. Chapter 18: Servicing Non-Performing Loans
When the Deferred Amount Comes Due
Across all these programs the triggering events are nearly identical. The deferred balance has to be paid in full when any of the following happens:
- You sell the home or transfer title.
- You refinance the mortgage.
- You pay off the loan early.
- You reach the end of your loan term and make your final scheduled payment.
Until one of those things happens, you don’t send a check for the deferred portion. You just keep making your regular monthly mortgage payment.
What It Does to Your Monthly Payment
The deferred piece itself has no monthly payment. The surprise for most borrowers is escrow. While you were in forbearance, your lender kept paying your property taxes and insurance, and the shortage that created has to be replenished through your monthly payment.
Federal regulations set a floor: if the shortage equals one month’s escrow payment or more, the servicer can spread repayment over at least 12 months.6Consumer Financial Protection Bureau. 12 CFR 1024.17 Escrow Accounts Fannie Mae’s deferral guidelines allow the shortage to be spread over up to 60 months.4Fannie Mae. Payment Deferral Even stretched over the longer window, the added escrow amount can push your housing payment noticeably higher than it was before forbearance. If taxes or insurance premiums also went up in the meantime, the jump is steeper.
The deferred balance also raises your effective loan-to-value ratio because it represents additional debt secured by the same property. If your home’s value hasn’t risen enough to offset it, you may be closer to underwater than you realize, and that higher LTV can block you from tapping home equity or qualifying for certain refinance programs.
Selling or Refinancing With a Deferred Balance
You can sell your home while carrying a deferred balance, but the full amount has to be paid off at closing. The title company will request a payoff statement that includes the remaining principal, any accrued interest, and the separate deferred lien or partial claim. All of it comes out of your sale proceeds before you receive anything. If the sale price doesn’t cover the combined total, you’ll need to bring cash to closing or negotiate a short sale with your lender.
Refinancing works the same way: the new loan has to be large enough to pay off both the existing mortgage and the deferred amount. Fannie Mae has said borrowers who completed a loss mitigation solution such as a payment deferral, repayment plan, or modification are eligible for a new refinance or purchase mortgage after making just three timely payments. Borrowers who fully reinstated by repaying all missed payments have no waiting period.7Fannie Mae. Fannie Mae Announces Flexibilities for Refinance and Home Purchase Eligibility
For FHA and VA loans, the partial claim subordinate lien has to be paid in full upon refinancing.3Veterans Benefits Administration. Circular 26-25-9 – Procedure for the Collection of Partial Claim Funds You can’t simply roll a partial claim into a new FHA or VA loan without satisfying the existing lien first. Run your numbers before applying, because closing costs plus the partial claim payoff can eat most of the equity you thought you had.
Credit Reporting
How a deferred balance looks on your credit report depends on whether you were current when you entered forbearance. The CARES Act required servicers to keep reporting the account as current throughout a COVID-related forbearance accommodation if you were current when you entered it. If you were already delinquent going in, the servicer had to maintain your existing delinquency status and then report you as current once you caught up.8Office of the Law Revision Counsel. 15 U.S. Code 1681s-2 – Responsibilities of Furnishers of Information to Consumer Reporting Agencies
That protection applied during the covered period tied to the COVID-19 national emergency declaration. For forbearances outside that window, normal credit reporting rules apply, and missed payments can show up as delinquencies. Even with CARES Act protections in place, the deferred balance or partial claim lien itself still appears on your credit report as an outstanding obligation. New lenders see it and weigh it in their decisions.
Tax Consequences
A deferred balance by itself does not create a taxable event. You still owe the money; it has just been rescheduled. Taxes come into play in two situations: when you actually pay deferred interest, and when any portion of the deferred balance is forgiven.
Mortgage interest is reported on IRS Form 1098 only in the year you actually pay it, not when it accrues.9Internal Revenue Service. About Form 1098, Mortgage Interest Statement If deferred interest gets folded into a modified loan, you deduct that interest over the years as you pay down the modified balance. If the deferred amount sits in a non-interest-bearing lien, there’s no interest to deduct until the lien is paid off.
If your lender forgives part of the deferred principal through a modification or settlement, that forgiven amount is cancellation-of-debt income, and the lender will report it on Form 1099-C.10Internal Revenue Service. About Form 1099-C, Cancellation of Debt It’s taxable unless you qualify for an exclusion. Two are worth knowing:
- Insolvency exclusion: If your total liabilities exceeded the fair market value of your total assets immediately before the debt was forgiven, you can exclude the forgiven amount up to the extent of your insolvency. The exclusion is permanent.11Office of the Law Revision Counsel. 26 U.S. Code 108 – Income From Discharge of Indebtedness
- Qualified principal residence exclusion: For mortgage debt discharged before January 1, 2026, you could exclude up to $750,000 ($375,000 if married filing separately) of forgiven debt on your primary home. This exclusion expired at the end of 2025 and, as of this writing, has not been extended for 2026.12Internal Revenue Service. Instructions for Form 982
To claim either exclusion, file IRS Form 982 with your tax return for the year the discharge occurred.12Internal Revenue Service. Instructions for Form 982 Skipping that form is a common mistake, and it can leave the IRS treating the entire forgiven amount as taxable income by default.