Can You Refinance a Mortgage in Forbearance?

If you currently have a mortgage forbearance agreement with your lender, you are not alone. 

Millions of Americans have chosen to reduce or pause their monthly mortgage payments while they financially recover from the COVID-19 pandemic.

But, if you’re reading this, you may not have entered this agreement yet and instead want to know what the long-term effects could be if you decide to do it.

Regardless of where you are in the forbearance process, we will share with you what forbearance entails and whether you have the option to refinance to a loan with more favorable terms.

What is Mortgage Forbearance?

Mortgage forbearance means that due to unprecedented financial hardship, such as an illness, job loss, or recent disaster, you enter an agreement with your lender to stop or reduce your monthly loan payments.

You are required to resume payments once the specified time period ends — usually in three to six months. Mortgage forbearance is not loan forgiveness.

While forbearance was an option for struggling homeowners long before the pandemic, once COVID-19 resulted in widespread layoffs, job loss, and illness, the government put the CARES Act into place.

This legislation allowed those with federally backed loans to request forbearance for up to 18 months, with no proof of hardship required.

Can I Refinance my Mortgage if I am in Forbearance?

While millions of homeowners opted to enter forbearance agreements, others were taking advantage of record-low interest rates by refinancing their mortgages.

This left many wondering, can I do both? The answer is a bit more complicated than a simple “yes” or “no.”

Some people who entered forbearance agreements did so merely as a precaution. This means that while they chose to go on forbearance, they were able to continue their monthly payments. 

These borrowers have the option to refinance because they didn’t miss any payments.

What About Borrowers Who Couldn’t Make Payments?

Most other borrowers will fall into this category. The majority of those who entered forbearance were unable to continue their monthly payments in full, or at all. 

These homeowners cannot refinance until they exit forbearance and continue making payments. 

The general guidelines from federally backed mortgage companies Fannie Mae and Freddie Mac state that borrowers must make three monthly on-time payments before they can exit forbearance and become eligible for refinancing.

If your loan is backed by the FHA, USDA, or VA, the rules may vary but generally follow the guidelines from Fannie Mae and Freddie Mac. Your lender will be able to tell you the specifics about your loan.

Other Considerations for Refinance After Mortgage Forbearance

If you are eager to refinance but in a mortgage forbearance agreement, reach out to your lender to discuss ending the agreement and resuming payments. This way, you will be closer to being eligible to refinance.

Then, check on your credit score and credit report. As part of the COVID-19 legislation, those on forbearance were not supposed to have their credit affected. Normally, forbearance does impact credit.

Evaluate your scores and reports to check for errors and have them fixed prior to refinancing. Pay down your debts and don’t open any new accounts.

Finally, work closely with your lender to determine whether refinancing is a smart move right now. You can do the math to figure out whether the amount you save refinancing will be worth it at this time.

Benefits of Refinancing After Mortgage Forbearance

If you haven’t entered a forbearance agreement yet, you should talk to your lender about whether refinancing first would be a better move. With the current rates, you may be able to reduce your payments and help out your financial situation.

If you and your lender determine that refinancing instead of mortgage forbearance is worth it, you can save yourself the trouble of halting and accumulating payments or taking longer to pay back your loan.

However, many people reading this will already be in forbearance. Fortunately, there are still many benefits to refinancing after exiting forbearance, including:

  • Lower interest rate and monthly payments
  • Extend your repayment period to 30 years for lower payments
  • Shorten your repayment period to 15 or 20 years to pay back loan faster
  • Switch from an adjustable-rate to fixed-rate mortgage
  • Cash out on home equity to pay for big expenses
  • If you’re eligible for a streamline refinance, you can refinance quicker and with less documentation

There are multiple considerations to each option that you will only be able to sort out with a lender who understands your full situation, loan type, and loan options.

If you’re interested in refinancing your mortgage loan for more favorable terms that work better for your unique financial situation, contact the professional loan officers at River City Mortgage today. Or, provide some information to us so you can get a rate quote. We look forward to reviewing your unique situation and helping you find a loan option that works best for you.

Photo by Curtis Adams from Pexels

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