Can You Refinance a Mortgage in Forbearance?
If you want to refinance your mortgage but you’re enrolled in a forbearance program, you will first need to end the forbearance then meet certain conditions.
Refinancing involves paying off your original loan taking out a new loan with new terms. If you can reduce your interest rate or lengthen your repayment period, your new mortgage payment may be easier to manage.
Canceling your mortgage forbearance plan refinancing could put your home loan back on track. Here’s what you need to know.
What Is Mortgage Forbearance?
Mortgage forbearance is an agreement between you your loan servicer or lender that temporarily pauses or reduces your mortgage payments. The bank also agrees not to start foreclosure proceedings during this time.
Homeowners who have a federally backed mortgage are facing pandemic-related hardships are entitled to a forbearance of up to 18 months.
If your loan is owned by Fannie Mae or Freddie Mac, you don’t have a deadline for requesting an initial forbearance. The deadline is Sept. 30, 2021, for requesting an initial forbearance if your loan is guaranteed by the Federal Housing Administration, the Department of Agriculture or the Department of Veterans Affairs.
Forbearance agreements eventually end, though, homeowners might be stuck with expensive mortgage payments just as they’re getting back on their feet.
“The homeowners will also need to make up the missed payments,” says Ed DeMarco, president of the Housing Policy Council, a trade group representing mortgage lenders servicers. “These missed payments may be deferred to the end of their mortgage term or may be rolled into the mortgage balance.”
In these cases, a refinance might help. “Today’s low interest rate environment creates an opportunity for many homeowners to reduce their monthly mortgage payments or shorten their loan term,” DeMarco says, “either of which may reduce risk for the borrower the lender.”
Can You Refinance a Mortgage in Forbearance?
Before the pandemic, homeowners had to wait at least 12 months after their payments were current again to apply for refinancing. But COVID-19 has changed the rules, certain borrowers might be able to refinance sooner.
If you have a loan backed by Fannie Mae or Freddie Mac, or by the FHA, USDA or VA, here is what you need to know:
Fannie Mae or Freddie Mac. You’ll need to make three timely payments under a loan modification or repayment plan before you can refinance. Then you may refinance the entire loan amount, including any missed payments, into a new loan.
You can use the online lookup tools for Fannie Mae Freddie Mac to find out whether one of them owns your mortgage.
FHA. Borrowers will need to exit forbearance to refinance. “But the requirements vary by loan program or by the individual lender or investor that holds the loan,” DeMarco says.
If you want a rate-and-term FHA refinance, for example, you must first make three consecutive on-time payments. Streamline refinances also require a minimum of three consecutive payments, while cash-out refinances require at least 12 consecutive payments.
USDA or VA. If your mortgage is backed by one of these agencies, call your mortgage servicer to see what your options are. You can look up your loan servicer using the Mortgage Electronic Registration Systems, or MERS, website.
How Can You Qualify for a Refinance?
Borrowers can refinance after a forbearance, but only if they make timely mortgage payments following the forbearance period.
If you have ended your forbearance made the required number of on-time payments, you can start the refinancing process. Here’s what you’ll want to do:
Assess your financial standing. Eligibility for refinancing your mortgage depends largely on your financial situation. Lenders generally look for a credit score of at least 620, which falls in FICO’s fair range, a debt-to-income ratio of no more than 43% for conventional loan refinancing.
But many lenders have ramped up their requirements.
“To qualify for a refinance now, since the pandemic hit, is a bit harder,” says Karen Solgard, a loan consultant with New American Funding, a national mortgage lender. “Lenders are really looking for signs that the borrower may be headed to a forbearance request. I have been seeing that credit scores below 700 will make the interest rate go up considerably, unless there is at least 40% equity in the property.”
Improve your credit score, if necessary. Here’s how:
- Always pay your bills on time.
- Pay down your debt. Using no more than 30% of the available credit on any card can help your credit score.
- Pull your credit reports for free from AnnualCreditReport.com look for inaccuracies. You can dispute errors with the credit reporting agencies.
- If one of your friends or family members has a strong credit history, ask to be added to an account as an authorized user.
- Avoid applying for new credit, which can signal a worsening financial situation.
- Keep credit card accounts open to maintain the length of your credit history.
Contact several lenders to obtain quotes. Compare interest rates, annual percentage rates, estimated monthly payments closing costs.
“Check interest rates to see if they are about 1% lower than your current rate,” Solgard says. “Right now, rates are at historic lows. If (your) current rate is above 4%, there may be a benefit to refinance.”
The refinance might even work in your favor with a shorter loan term, especially if you’re getting rid of mortgage insurance, she adds.
“I am seeing an advantage for some borrowers to refinance to a 15-year (term) to get a lower interest rate,” Solgard says. “If there is plenty of equity in the property, they are switching from FHA (with) mortgage insurance to a conventional 15-year (mortgage), the payment is nearly the same.”
What Are Alternatives to a Refinance?
Refinancing isn’t the only option if you need a more manageable mortgage payment. You can request a loan modification, sell your home or stay in forbearance.
Here’s more about each of these choices:
Asking for a loan modification. This is an arrangement you make with your lender to permanently change your loan terms. The lender could lower your interest rate, lengthen your loan term or, in rare cases, forgive some of your principal.
A loan modification might be a good option if you don’t qualify to refinance or can’t afford closing costs.
“A lender really wants people to be able to keep making monthly payments, even if it is at a reduced amount,” Solgard says. “The homeowner needs to project their budget out into the future. If they really can’t afford to pay the current mortgage, they may have trouble refinancing as well, the loan modification is the only option.”
Selling your home. Consider your income your expenses for the foreseeable future. If you think you’ll have trouble making payments because money is tight but you have equity in your home, you might want to sell it to avoid a short sale or foreclosure.
But keep in mind that any payments missed during forbearance will probably be due once you sell the home.
Extending forbearance. After three to six months in forbearance, evaluate whether you’re still financially struggling then call your loan servicer to determine the next steps.
“The servicer may be able to extend the forbearance, but the homeowner must request such an extension,” DeMarco says.
Extending forbearance might be a good idea if you can’t pay your bills this option is still available to you, Solgard says. Just be sure you have a plan for eventually making up your missed payments.
After exiting mortgage forbearance, you may be able to defer those payments to the end of the loan term, create a payment plan with your loan servicer or modify your loan terms. You can also pay everything back in one lump sum, though your loan servicer can’t require it.
Ultimately, the guidelines on forbearance refinancing mean that homeowners don’t have to choose between short- long-term mortgage relief. If you’ve entered forbearance, refinancing to a lower interest rate is still within reach can give you more control over your financial future.