Forbearance and Refinancing
Taking on a mortgage is a big responsibility, and while you always intend to make your payments on time, life can sometimes throw unexpected challenges your way. If you’re going through a temporary hardship or experiencing a loss of income, a forbearance might provide some relief by allowing you to pause or reduce your mortgage payments until you get back on your feet.
However, one common question homeowners have when they’re in forbearance is, “Does mortgage forbearance affect refinancing?” In this post, we’ll explore how forbearance can impact your ability to refinance your mortgage and what steps you can take to improve your chances of qualifying for a refinance after forbearance ends.
Can You Refinance While in Forbearance?
Forbearance can make it more difficult to refinance your mortgage. When you’re in forbearance, it’s typically reported to the credit bureaus, and this can have a negative impact on your credit score. In most cases, forbearance will be considered a form of delinquency because you’re not making payments according to the original terms of the loan.
That said, there are some exceptions. If the forbearance was granted as part of a natural disaster recovery plan, it may not negatively affect your credit score. These types of forbearances are often considered non-credit impacting by lenders, as they’re part of government-backed relief programs.
If you’ve exited forbearance and have made the necessary payments, there are still opportunities to refinance, particularly if you qualify based on your credit score, debt-to-income ratio, and equity. You may be able to access refinancing options through programs like Fannie Mae, Freddie Mac, or a Jumbo Smart loan through lenders like Rocket Mortgage®.
How Does Forbearance Impact Specific Types of Refinancing Loans?
The effect of forbearance on your ability to refinance depends on the type of loan you’re applying for. Here’s a breakdown of how forbearance affects different types of loans:
Conventional Loans (Fannie Mae & Freddie Mac)
For conventional loans, you may still be able to refinance after exiting forbearance, provided you meet other qualification criteria, such as credit score, debt-to-income ratio, and available equity. However, you’ll generally need to demonstrate that you’re back on track with payments and have resumed making regular payments post-forbearance.
FHA Loans
If you have an FHA loan, the rules are slightly different. You can refinance into an FHA loan as long as you’ve exited forbearance and made all required payments. If you missed any payments during the forbearance, there are specific waiting periods you’ll need to meet before refinancing:
- Rate-and-term refinance: You must have made three consecutive payments as part of your workout plan.
- Cash-out refinance: You’ll need to have made at least a year’s worth of payments before qualifying.
VA Loans
Veterans, active-duty service members, and surviving spouses with VA loans may be eligible for a refinance after exiting forbearance. As with other loan types, you’ll need to meet specific eligibility requirements and follow VA seasoning guidelines, which often vary based on your individual situation. It’s a good idea to consult with a Home Loan Expert to understand your specific requirements.
Jumbo Loans
Jumbo Smart loans, such as those from Rocket Mortgage®, can be more flexible in certain situations. If you continued making payments during your forbearance or caught up on any missed payments before closing on a new loan, you may qualify for a refinance. There are also special considerations if the forbearance was on a previous home that you’ve since sold to pay off the mortgage.
- If you were in a workout plan during forbearance, you may have other options, such as completing the repayment plan before refinancing.
- If you utilized deferral, you’ll need to make three consecutive on-time payments after exiting forbearance before applying for a refinance.
Given the complexity of Jumbo loan requirements, it’s best to speak directly with a Home Loan Expert to explore your options.
Steps to Refinance Your Mortgage After Forbearance
If you’ve completed forbearance and are looking to refinance, there are several important steps you should take to improve your chances of success:
- Get Current or Keep Up with Post-Forbearance Payments
The first step in preparing to refinance is making sure that you’re either current on your loan or keeping up with payments under any post-forbearance workout plan. Missing payments or falling behind can negatively impact your credit, and it could further delay your ability to refinance.
To qualify for a refinance, most lenders will require that you’ve made a certain number of on-time payments after exiting forbearance:
- Conventional Loans, FHA rate/term loans, and Jumbo loans: You’ll typically need to have made at least three consecutive payments.
- FHA Cash-out Refinances: A full year of payments is generally required.
- Work on Improving Your Credit Score
Forbearance, especially if it wasn’t a natural disaster forbearance, can negatively impact your credit score. Even though forbearance isn’t permanent, the longer you wait to get your credit back on track, the more it could affect your refinance options.
Here’s what you can do to rebuild your credit:
- Keep Up with Payments: After your forbearance ends, it’s crucial to keep up with payments on all your accounts, not just your mortgage.
- Avoid New Credit: Opening new credit accounts could signal to lenders that you’re struggling with debt management, which could hurt your score.
- Pay Down Debt: Reducing credit card balances and other debts can have a positive impact on your credit score.
- Keep Your Debt in Check
Lenders will closely examine your debt-to-income (DTI) ratio when you apply for a refinance. This ratio compares your monthly debt payments to your gross monthly income. A high DTI could make it more difficult to qualify for a refinance, so it’s important to manage your debt carefully.
- Front-End DTI: This is the percentage of your monthly income that goes toward housing expenses, including your mortgage, property taxes, insurance, and HOA fees. Keeping this ratio under 28-30% is ideal for most loan types.
- Back-End DTI: This is the total percentage of your income that goes toward all debt payments, including your mortgage, credit cards, student loans, and other obligations. Most lenders prefer a back-end DTI under 43%.
By paying down high-interest debt and reducing your overall debt load, you can improve your DTI and increase your chances of qualifying for a refinance.
Refinancing After Forbearance: The Bottom Line
Mortgage forbearance can provide much-needed relief during difficult times, but it can also complicate your ability to refinance in the future. Forbearance typically results in negative credit reporting and can affect your credit score, making it more challenging to qualify for refinancing options. However, it’s not a permanent roadblock. With time, effort, and a focus on rebuilding your credit and managing debt, you can increase your chances of successfully refinancing your mortgage after forbearance.
If you’re ready to explore your refinancing options or have questions about how forbearance could affect your mortgage, contact Avantiway Financial. Our team of experts can help you navigate the refinancing process and find the best solution for your financial situation.