Can You Refi While in Forbearance?

Mortgage forbearance allows homeowners experiencing financial hardship to temporarily pause or reduce their monthly mortgage payments. Refinancing, conversely, involves replacing an existing mortgage with a new one, often to secure a lower interest rate, change loan terms, or access home equity. Refinancing while in forbearance presents challenges, yet it is often possible under specific conditions. Homeowners must understand that forbearance is a temporary relief, not loan forgiveness, meaning the paused payments will eventually need to be repaid.

Meeting Lender Requirements

For conventional loans backed by Fannie Mae or Freddie Mac, borrowers typically need to have exited forbearance and made at least three consecutive, on-time payments on their mortgage. If payments were missed and resolved through a repayment plan, payment deferral, or loan modification, three consecutive on-time payments under that new plan are generally required. Homeowners who entered forbearance but continued making their payments may be eligible for refinancing without a waiting period, provided they are current on their mortgage.

Federal Housing Administration (FHA) loans generally follow similar guidelines, requiring borrowers to exit forbearance and make at least three consecutive, on-time payments for most refinance types. However, for FHA cash-out refinances, a waiting period of at least 12 consecutive monthly payments after completing the forbearance plan is typically required. VA loans offer some distinct flexibility; while a waiting period can apply, especially for cash-out refinances, a VA Interest Rate Reduction Refinance Loan (IRRRL) may not have a waiting period if the borrower can demonstrate recovery from the financial hardship that led to forbearance. For VA loans, if a borrower made at least six consecutive payments before entering forbearance, they might be able to refinance immediately without a waiting period.

Lenders will also scrutinize the borrower’s credit score and history, as a strong credit profile is generally necessary for favorable refinancing terms. While forbearance under programs like the CARES Act might not directly impact credit scores if payments were current, any missed payments outside of a formal agreement can negatively affect credit. Lenders assess current income and employment stability to ensure the borrower’s ability to make future payments, often reviewing debt-to-income (DTI) ratios. The loan-to-value (LTV) ratio, which considers home equity and property appraisal, also plays a role, as sufficient equity can improve refinance eligibility.

Navigating the Refinance Application

Finding a lender experienced with situations involving forbearance is often beneficial, as they can provide tailored guidance and navigate the nuances of specific loan programs. Many lenders have updated their policies to accommodate borrowers who utilized forbearance.

The application process requires documents to verify financial information. This includes:
Recent pay stubs, W-2 forms, and tax returns for income verification.
Bank statements to assess financial reserves.
Current mortgage statements to confirm payment history and loan details.
Proof of forbearance exit and completion of any repayment plans.

After submitting the application and supporting documents, the loan enters the underwriting process. During this stage, the lender thoroughly scrutinizes the borrower’s financial standing, with particular attention paid to the re-established payment history post-forbearance. Underwriters evaluate the risk associated with the new loan, ensuring that the borrower has a stable income and manageable debt obligations. The property will also undergo an appraisal to determine its current market value, which is used to calculate the loan-to-value ratio.

The final stages of the refinance process involve the closing, where all necessary documents are signed, and funds are disbursed. This includes reviewing the Closing Disclosure, which details the new loan terms, interest rate, and all associated costs.

Key Considerations Before Refinancing

Refinancing involves various closing costs and fees, which typically range from 2% to 6% of the loan amount. These costs can include origination fees, appraisal fees, credit report fees, and title services, among others. Borrowers should calculate the break-even point by dividing the total closing costs by the monthly savings to determine how long it will take to recoup the upfront expenses.

Refinancing can significantly impact long-term financial health by altering the new payment amount, interest rate, and loan term. A lower interest rate can reduce the overall cost of the loan, while extending the loan term might lower monthly payments but could increase the total interest paid over the life of the loan. It is important to assess whether the new terms align with personal financial goals and current budget.

Comparing refinance offers from multiple lenders is a prudent step to ensure the most favorable terms and interest rates. Lenders may have varying eligibility criteria and fee structures, making it beneficial to shop around. This comparison can help identify the best option for individual circumstances, potentially leading to substantial savings over time.

In some cases, alternatives such as a loan modification might be more appropriate, especially if a borrower is still experiencing significant financial hardship. A loan modification involves altering the terms of the existing loan to make payments more manageable, often without replacing the original mortgage. This option can adjust the interest rate, extend the loan duration, or change the payment schedule to provide relief. Unlike refinancing, which generally requires a good credit score and stable finances, loan modifications are often accessible to borrowers with lower credit scores who are facing hardship.