Does Mortgage Forbearance Affect Refinancing?

Mortgage forbearance offers homeowners a temporary pause or reduction in their mortgage payments during periods of financial hardship. While it provides immediate relief, it generally impacts a homeowner’s ability to refinance their loan in the immediate future. Lenders view consistent payments as a key indicator of financial stability, and forbearance signals a deviation from that pattern.

How Forbearance Influences Refinancing Applications

Lenders review payment history to assess creditworthiness and ability to manage new debt. A mortgage forbearance, even if formally agreed upon, indicates a pause in the regular payment schedule. This deviation raises concerns for lenders, suggesting a heightened risk profile compared to an applicant with an uninterrupted payment record.

While a mortgage account in forbearance is reported as “current” to credit bureaus, it signifies a period where payments were not made as originally scheduled. Lenders access detailed payment histories, not just credit scores, to evaluate financial behavior. The presence of forbearance can suggest underlying financial instability to new lenders.

Lenders assess the likelihood of a borrower repaying a new loan; past difficulty increases perceived risk. Consequently, a refinance application submitted during or immediately after forbearance is subject to heightened scrutiny. This caution stems from the lender’s need to mitigate potential losses associated with future payment defaults.

Refinancing Eligibility After Forbearance

Refinancing eligibility after forbearance requires demonstrating consistent financial stability. Lenders, including those for government-backed loans (FHA or VA), mandate a specific number of on-time mortgage payments post-forbearance. This period ranges from three to twelve consecutive months of full, on-time payments to re-establish a reliable payment history.

Before a refinance can be approved, all deferred or missed payments from the forbearance period must be resolved. Resolution options include a lump-sum repayment, a structured repayment plan, a loan modification, or a deferral that adds missed payments to the end of the loan term. Lenders require clear documentation that the original loan is current and all forbearance obligations have been addressed.

While forbearance might not directly lower a credit score if reported as “current,” the underlying financial distress can affect a borrower’s overall credit profile. Lenders evaluate the applicant’s current credit score, which needs to be above a certain threshold (e.g., 620 to 680 for conventional loans). A comprehensive review of the credit report for other delinquencies or increased debt is standard practice.

Lenders re-evaluate the applicant’s debt-to-income (DTI) ratio, comparing total monthly debt payments to gross monthly income. This ratio, which needs to be below 43% to 50% for many loan programs, ensures the borrower has sufficient income for the new mortgage payment and other obligations. Any changes in income or increased debt during or after forbearance directly impact this assessment.

Preparing for a Refinance Application

Homeowners aiming to refinance after exiting forbearance should prioritize establishing a consistent record of on-time mortgage payments. Maintaining a flawless payment history for several months after the forbearance period concludes demonstrates renewed financial stability and reliability to potential lenders.

Reviewing personal credit reports for accuracy is important. Borrowers should obtain copies from all three major credit bureaus and dispute inaccuracies or outdated information. Ensure the forbearance period is correctly reflected as “current” and all other accounts are in good standing.

Gathering comprehensive financial documentation is necessary for a refinance application. This includes recent pay stubs, W-2 forms for the past two years, federal tax returns, and bank statements covering the last 60 to 90 days. Applicants should also have current mortgage statements and official documentation proving successful exit from forbearance and resolution of deferred payments.

Communicate proactively with the current mortgage servicer to clarify forbearance exit terms and remaining obligations. Understanding how the servicer reports the exit to credit bureaus and obtaining clear documentation of payment resolution can streamline the refinance application. Exploring different refinance loans, including government programs like FHA or VA, may reveal more accessible options.