How to handle interest on deferred borrower payments?

Considerations:

• If you would like a borrower to be able to “skip” one or more payments on their loan, the first thing to determine is whether the borrower will have to “catch-up” at a later date, (by actually making payments for the missed payments) or will not have to "catch up".
  • If the borrower will have to catch-up, i.e., they have to make payments at a later date for the installments that were skipped or missed, then the only thing that would be required to do is to not charge late charges or other penalties during the forbearance period, and then come up with a forbearance agreement on how the missed payments will be made in the future to "catch-up".
  • If the borrower will not have to “catch-up”, the Lender needs to decide how the interest due for the period should be handled, i.e., is the interest for that period being “deferred”, “capitalized”, or “forgiven”.  The procedures below will discuss how to enter transactions to achieve the desired result.

Procedure: 

• Post a Regular Payment for each Due Date to be skipped. 
  • Enter a $0.00 amount received from Borrower (or the amount of a scheduled Impound/Escrow payment if those payments are still required and have been received).

• • Enter a reference of: SKIPPED, DEFERRED, CAPITALIZED, WAIVED or whatever best describes how you will treat the interest owing for the period(s), based on the options described below. 

• Carefully adjust the Payment Distribution section of the payment transaction to achieve the desired treatment of periodic interest due using one of the three options below:

• • Defer Interest - Enter the amount received from borrower as $0.00 and negatively amortize the interest owed to Unpaid Interest.
    • Depending on the loan settings, there will be a negative amount shown in either the principal or the unpaid interest field, notated by parentheses. A negative amount indicates that balance will be increased.  If the negative is to principal, enter the negative amount into the unpaid interest field.
    • Generally unpaid interest would be required to be paid prior to any future amortization to principal. You may want to review the settings in the Loan Term Options screen, under the Unpaid Interest Handling settings for additional unpaid interest handling options. 

OPTION 2: 

• • Capitalize Interest – Enter the amount received from borrower as $0.00 and negatively amortize the interest owed to the Principal Balance on the loan.
    • There will be a negative amount shown in the principal field that indicates that the Principal Balance will be “increased”. If the negative is to Unpaid Interest, then enter a $0.00 amount in the unpaid interest field so that the increase is to principal. 
      • This option is what most lenders know as: "Add to the end of the loan". It's also similar to a credit card with a skipped payment, i.e., future interest would be charged on the higher balance. 
      • You can also extend the maturity date so there is not a large balloon payment due at maturity. 

OPTION 3: 

• • Forgive Interest - Override the interest calculation field by entering a $0.00 amount. This will ensure nothing is added to unpaid interest balance or the principal balance.
• As with entering any payment transactions, please use the Edit Payment Distribution feature to review the distribution to all lender & vendor accounts prior to applying payments.

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