Can You Refinance a Mortgage in Forbearance?

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The economic crisis brought on by the COVID-19 pandemic has left many homeowners reeling. According to the Mortgage Bankers Association (MBA), roughly 4.2 million homeowners are on mortgage forbearance plans, which allow them to postpone monthly payments.

At the same time, many homeowners are looking to take advantage of record-low interest rates to refinance their mortgage loans so they can obtain some payment relief and save money. The MBA Refinance Index, which measures the number of refinance applications submitted, is up 106% from the same week a year ago in mid-June.

But is it possible to refinance your mortgage loan while you're in forbearance? In most cases, unfortunately, it's not. However, you may have some options if you end your forbearance. Here's what you need to know.

How Does Mortgage Forbearance Work?

Mortgage forbearance is a process that allows you to pause or reduce your monthly mortgage payment for a set period, which can vary based on your situation and your lender.

While forbearance can give you some temporary relief, it's not the same as forgiveness: Forbearance requires you to make up the payments you missed once the forbearance period ends.

The Coronavirus Aid, Relief and Economic Security (CARES) Act allows homeowners with a federally backed mortgage to request forbearance for up to 18 months of total forbearance due to financial hardship.

The law applies to loans backed by Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), the U.S. Department of Agriculture (USDA) and U.S. Department of Veterans Affairs (VA).

If you request forbearance under the CARES Act, you don't need to worry about providing documentation to prove your financial need—your claim of pandemic-related hardship is enough. There are no additional fees, penalties or interest associated with the process beyond the scheduled amounts.

How Long After Forbearance Can I Refinance?

Mortgage forbearance can be a good way to take precautions if you're not sure about your immediate financial future, and it may be a necessity for some homeowners who have lost their jobs or had their hours cut significantly.

But postponing your monthly mortgage payments could backfire if you want to refinance or even buy a new home in the near future.

That's because the organizations and government agencies that insure the vast majority of mortgage loans in the U.S. do not allow homeowners with a mortgage loan in forbearance to refinance that loan or even obtain a new mortgage loan while in forbearance. Previously, it was also impossible to get approved for a new loan for a full year after loan payments were current again.

In May, the Federal Housing Finance Agency issued guidance for borrowers with mortgages backed by Fannie Mae and Freddie Mac, reducing that timeframe. Now you can refinance your current mortgage or purchase a new home once you've made three consecutive mortgage payments, either after your forbearance plan ends or under a repayment plan or loan modification.

So, if you're weighing forbearance as a precaution but haven't pulled the trigger yet, consider whether you want to refinance or purchase a new home in the near future, and whether the short-term benefits of forbearance are worth the longer-term costs.

What to Do if You're in Forbearance and Want to Refinance

If you're currently on a forbearance plan with your mortgage lender and hope to refinance your loan, contact your lender immediately to end the forbearance so you can start making monthly payments again.

If your loan is backed by Fannie Mae or Freddie Mac, which most conventional loans are, simply make your next three consecutive monthly payments on time. Once that's completed, you'll be able to start the process of refinancing your home. If you're not sure whether your home is backed by Fannie Mae or Freddie Mac, ask your lender.

If you have a mortgage loan that's backed by a government agency, including the FHA, USDA or VA, call your mortgage lender to see what your options are.

How to Make Sure Your Credit is Refinance-Ready

If you're thinking about refinancing your mortgage loan, it's crucial to have your credit in good enough shape to make the process worth it. The better your credit score, the higher your chances of scoring a lower interest rate.

To start, check your credit score and your credit report to determine which areas you need to address. For example, if you're behind on payments with a creditor, work on getting current as quickly as possible. This won't necessarily improve your credit score immediately, but it could prevent further damage.

Other ways to improve your credit score include:

  • Work to pay down credit card debt and keep your account balances low relative to their credit limits.
  • Review your credit report for inaccuracies and dispute information you believe to be incorrect with the credit reporting agencies.
  • If you have a family member with a strong credit history and a credit card with good payment history, ask to be added as an authorized user.
  • Avoid applying for new credit unless absolutely necessary.
  • Avoid closing unused credit cards.

While some of these steps can provide relatively quick results—such as paying off your credit cards—others may take more time. Depending on your current situation, you may benefit from taking more time to work on your credit to ensure better terms on the new loan.

Immediate Needs May Be More Important Than Long-term Goals

The coronavirus pandemic has caused many unexpected problems across the U.S. and the globe. If you're struggling financially due to unemployment, reduced hours or other hardship, mortgage forbearance may be the best solution for your immediate needs—even if it means you have to put off refinancing your home.

Taking care of your immediate needs may cost you the chance to refinance at record-low rates, but taking advantage of generous forbearance options can prevent your situation from getting worse and help you manage other necessary expenses.

As you continue to work to get back on your feet financially, make it a priority to monitor your credit regularly to know where you stand, and spot potential issues that could damage your credit and make it more challenging to qualify for refinancing in the future.