Can You Refinance a Mortgage in Forbearance?

If you want to refinance your mortgage but you’re enrolled in a forbearance program, you will need to end the forbearance and meet certain conditions.

As the coronavirus pandemic drags on and strains Americans’ finances, 3.4 million homeowners were in forbearance in September, according to the Mortgage Bankers Association. At the same time, U.S. mortgage rates have hit record lows, which could help consumers obtain more affordable loans.

Refinancing involves paying off your original loan and taking out a new loan with new terms. If you can reduce your interest rate or lengthen your repayment period, your new mortgage payment should be lower for the long term.

In fact, more than 7 million homeowners could save at least $300 a month by refinancing their mortgages, according to mortgage data firm Black Knight.

Canceling your mortgage forbearance plan and refinancing instead could put your home loan back on track. Here’s what you need to know.

Mortgage forbearance is an agreement between you and 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.

If you have a federally backed mortgage and face pandemic-related hardship, you are entitled to a forbearance of up to a year under the coronavirus rescue package known as the CARES Act. That protection applies to loans backed by Fannie Mae or Freddie Mac, as well as mortgages insured by the U.S. Department of Agriculture, the Federal Housing Administration and the U.S. Department of Veterans Affairs.

Normally, forbearance can drag down a homeowner’s credit score, though less so than missed payments. But the CARES Act directs mortgage lenders to report your account as current to the credit bureaus, as long as you were not behind on payments when you requested the forbearance.

Forbearance agreements eventually end, though, and 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 and 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 may 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 and the lender.”

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, and certain borrowers might be able to refinance sooner.

If you have a loan backed by Fannie Mae or Freddie Mac, or by the FHA, the USDA or the VA, here is what you need to know:

Fannie Mae or Freddie Mac. You’ll need to take your mortgage out of forbearance and then make at least three consecutive on-time mortgage payments before you can refinance. You may then refinance the entire loan amount, including any missed payments, into a new loan.

You can use the online lookup tools for Fannie Mae and Freddie Mac to find out whether one of them owns your mortgage.

FHA. Borrowers will need to get out of 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. For a credit-qualifying streamline refinance, you will need to make at least six consecutive on-time 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.

Borrowers can refinance after a forbearance, but only if they make timely mortgage payments following the forbearance period.

If you have ended your forbearance and 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 and a debt-to-income ratio of no more than 43% for conventional loan refinancing.

But many lenders are ramping up their requirements. The average FICO credit score among conventional refinance borrowers in September was 767, according to Ellie Mae’s September 2020 Mortgage Origination Insight Report.

“To qualify for a refinance now, since the pandemic hit, is a bit harder,” says Karen Solgard, a loan consultant with New American Funding. “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.”

Contact several lenders to obtain loan quotes. Compare interest rates, annual percentage rates, estimated monthly payments and 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.”

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 for refinancing or don’t have the money to pay for 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, and the loan modification is the only option.”

Selling your home. Consider your income and your expenses for the next 12 months. If money will be 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.

Staying in the forbearance program. The CARES Act requires homeowners with certain types of loans in forbearance to evaluate at the six-month mark whether they need six more months of relief without penalties.

“A homeowner that has been in forbearance for six months must contact their mortgage servicer to determine the best next step,” DeMarco says. “The servicer may be able to extend the forbearance, but the homeowner must request such an extension.”

Homeowners should stay in forbearance programs if they can’t pay the bills without them, Solgard adds.

Ending a forbearance too soon can be risky. More than 80,000 homeowners who ended their forbearance in 2020 have subsequently become delinquent, according to the Consumer Financial Protection Bureau.

Ultimately, new guidelines on forbearance and refinancing mean that homeowners don’t have to choose between short- and long-term mortgage relief. If you’ve entered forbearance, refinancing to a lower interest rate is still within reach and can give you more control over your financial future.