Can You Refinance Your Home If You’re Behind on Payments?

Refinancing your home when behind on mortgage payments is challenging, but not impossible. While lenders prefer borrowers with a consistent payment history, specific circumstances and programs may offer pathways. Feasibility depends on the extent of delinquency, its reason, and your overall financial situation.

Lender Evaluation for Refinancing While Delinquent

Lenders assess several factors when considering a refinance application, especially if a homeowner is behind on payments. A significant consideration is the borrower’s credit history, with recent payment behavior scrutinized. A single missed payment 30 days past due can appear on a credit report and raise concerns. More severe delinquencies, such as 60 or 90 days past due, create substantial obstacles for conventional refinancing.

Lenders require consistent, on-time payments after any serious delinquency before considering a new loan. Some conventional lenders may not approve a refinance if there has been a payment 60 days or more late within the past 12 months. Recent missed payments have a more negative impact than older ones. A lower credit score from late payments makes refinancing more difficult and potentially more expensive.

Another factor is the debt-to-income (DTI) ratio, which compares monthly debt obligations to gross monthly income. Lenders use this ratio to determine if you have sufficient income to manage new loan payments alongside existing debts. Most lenders prefer a DTI below 43%, though some allow higher ratios if other financial profile aspects are strong. A high DTI indicates financial strain, making a lender hesitant to approve a new mortgage.

Home equity also plays a role. Lenders prefer borrowers to have at least 20% equity in their home to qualify for refinancing. Equity provides a cushion for the lender, reducing their risk if the borrower defaults. When behind on payments, equity can erode, complicating refinance efforts.

Lenders consider the reason for delinquency. While missed payments are a red flag, a temporary and explainable financial hardship, such as job loss, medical emergency, or divorce, might be viewed differently than chronic financial mismanagement. Providing a clear explanation and demonstrating a restored ability to make payments can be beneficial. Lenders need confidence in your renewed financial stability before extending new credit.

Government-Supported Refinance Initiatives

Government-backed refinance programs offer options for homeowners with past payment issues, though strict eligibility requirements apply. These programs help homeowners avoid foreclosure and achieve more manageable mortgage terms.

FHA Streamline Refinance

The Federal Housing Administration (FHA) offers a Streamline Refinance program to lower interest rates or monthly payments on existing FHA-insured mortgages. To qualify, borrowers must be current on payments. Some lenders might allow one 30-day late payment if it occurred more than three months prior and all subsequent payments have been on time, but most will not accept applications with recent delinquent payments. The FHA Streamline program requires at least 210 days to have passed since the closing date of the mortgage being refinanced, and at least six monthly payments made. This program does not require a new appraisal or a full credit check for non-credit qualifying options.

VA Interest Rate Reduction Refinance Loan (IRRRL)

For eligible service members, veterans, and surviving spouses, the Department of Veterans Affairs (VA) offers the Interest Rate Reduction Refinance Loan (IRRRL), also known as a VA Streamline Refinance. This program helps reduce interest rates or convert an adjustable-rate mortgage to a fixed-rate one. A requirement for the VA IRRRL is having no 30-day late payments on the current VA loan within the past 6 to 12 months. However, the VA may approve an IRRRL for a delinquent loan if the cause of the delinquency has been resolved and the veteran demonstrates the willingness and ability to make the proposed new payments. Borrowers must have made at least six consecutive monthly payments on their existing VA loan and 210 days must have passed since the first payment.

USDA Refinance Options

The United States Department of Agriculture (USDA) provides refinance options for eligible homeowners with existing USDA loans, such as the Streamline and Streamline-Assist programs. These programs help borrowers reduce interest rates and monthly payments. For a USDA streamline refinance, borrowers need to demonstrate a consistent history of on-time payments for the past 6 to 12 months. The existing loan must have closed at least 12 months prior. The refinance must result in a tangible benefit, such as a reduction in the monthly payment, a minimum of $50 for the Streamline-Assist option. While the USDA does not impose strict minimum credit score requirements, lenders look for scores around 620, though lower scores may be manually underwritten.

Alternative Strategies for Mortgage Delinquency

When direct refinancing is not feasible due to payment delinquency, several alternative strategies can help homeowners address mortgage issues and potentially avoid foreclosure. These options focus on restructuring the existing loan or transitioning out of homeownership in a controlled manner. Engage with your mortgage servicer as soon as possible to discuss these pathways.

Loan Modification

A loan modification is a permanent change to your mortgage terms, designed to make monthly payments more affordable. This can involve lowering the interest rate, extending the loan term, or adding missed payments to the loan balance. To qualify, homeowners need to prove a significant financial hardship, such as job loss or illness, and demonstrate they can afford the new, reduced payment. The home must be the borrower’s primary residence.

Forbearance Agreement

A forbearance agreement offers temporary relief by allowing you to pause or reduce mortgage payments for a set period. This option is used for short-term financial setbacks, like a temporary job loss. While payments are temporarily suspended or lowered, missed amounts are not forgiven and must be repaid later, either through a lump sum, a repayment plan, or by adding them to the end of the loan term. Forbearance periods last between three to six months but can be extended up to 12 to 18 months, depending on the loan type and circumstances.

Repayment Plan

A repayment plan is an agreement with your lender to catch up on missed payments by adding a portion of the past-due amount to your regular monthly payments over a specific period. These plans are short-term, lasting three to six months, and are suitable for homeowners who have experienced a temporary hardship and can now afford slightly higher payments. The goal is to bring the loan current within a manageable timeframe.

Short Sale

For homeowners who cannot keep their home, a short sale allows them to sell the property for less than the remaining mortgage balance, with the lender’s approval. The lender agrees to accept the sale proceeds as full or partial satisfaction of the debt, helping to avoid the consequences of foreclosure. To pursue a short sale, homeowners must demonstrate financial hardship and that the property’s value is less than the amount owed. This process requires extensive documentation, including a hardship letter.

Deed-in-Lieu of Foreclosure

A deed-in-lieu of foreclosure is a voluntary agreement where the homeowner transfers the property title to the lender to satisfy the mortgage debt. This option allows homeowners to avoid the public and credit-damaging process of a foreclosure. Lenders consider a deed-in-lieu when a homeowner can prove financial hardship and has no other liens on the property. Both the borrower and the lender must agree to this arrangement.