Most people take out a mortgage under the assumption they’ll have no problem paying it back. Unfortunately, life can throw financial curveballs. Forbearance is one option for homeowners experiencing financial hardship who need to take a break from their mortgage payments—something millions of borrowers took advantage of during the COVID-19 pandemic. In fact, as of June 2021, about 2 million homeowners are on some type of forbearance plan, according to an estimate by the Mortgage Bankers Association.
Refinancing has become a very viable option for cutting the cost of your mortgage. For those who were recently in forbearance, however, that can be tricky. Here’s what you need to know about how forbearance affects your refinancing options.
- Forbearance allows you to temporarily stop making payments on your mortgage due to a financial hardship.
- Before you can refinance your mortgage, it needs to be back in “good standing.”
- Depending on the mortgage provider, there are a number of requirements for refinancing after a forbearance; for example, Fannie Mae and Freddie Mac require a minimum of three on-time payments under the new plan before you are eligible to refinance.
What Is Forbearance?
Forbearance is an agreement between you and your mortgage lender that temporarily hits the pause button on your mortgage payments due to a financial hardship. Your lender agrees not to pursue foreclosure during this time.
Forbearance rules under the CARES Act, which was established in response to the COVID-19 pandemic, were updated for homeowners with federally backed loans who are experiencing pandemic-related hardship. It’s possible to request up to 18 months of forbearance, without any additional fees, penalties, or interest. You also aren’t required to provide any documentation of your hardship if it is due to the pandemic. Additionally, lenders are prohibited from reporting your forbearance to the credit bureaus.
That doesn’t mean you get out of paying your mortgage, though. “The payments are not forgiven, just delayed,” said Tony Grech, senior mortgage loan originator with Luxury Mortgage, in an email to The Balance. Interest still accrues during the forbearance period, and you may be on the hook for additional fees. At the end of the forbearance period, you are responsible for paying that money back.
Grech said that how this is done depends on the type of loan you have and your lender’s preferences. “Because the homeowner is basically kicking the can down the road, I don’t recommend taking forbearance unless absolutely necessary,” he said. “There can be consequences that stick with you long after your temporary financial dilemma.”
Can You Refinance a Mortgage After Forbearance?
To refinance, you will need to demonstrate that you’re on solid financial footing. Typically, lenders prefer a credit score of at least 620 (higher scores will qualify for better terms) and a debt-to-income ratio of 36% or less for conventional loans (although some may allow up to 50%).
If you’re in forbearance, however, most mortgage lenders won’t allow you to refinance. “In order to qualify for refinancing, your mortgage needs to be brought back into good standing,” Grech said. There are a few ways to do that, depending on what you’re able to work out with your lender.
How To Qualify for a Refinance
Before you can refinance, you need to come up with an agreement regarding how your missed payments will be repaid post-forbearance. The most common options include:
- Lump-sum payment: Also known as reinstatement, one option is to pay back your missed mortgage payments in one lump sum. However, this could be difficult considering you were facing financial difficulties previously, and is usually not required.
- Repayment plan: Your missed payments can also be split up and spread out over a certain period of time, allowing you to pay them back on top of your current monthly payments.
- Deferral or partial claim: If you don’t have the cash flow available, another option is to tack on those missed payments to the end of your mortgage term, essentially extending the repayment period by a year. In some cases, the lender will place a lien on your property for the missed payments and you need to pay them back when you sell or refinance the home, Grech noted.
- Modification: There may be a chance you haven’t gotten back on your feet following the forbearance period. If that’s the case, your lender might allow you to restructure your mortgage so that the payments are lower. That will likely require extending the term length and paying more over the life of the loan.
Grech noted that if your loan is backed by Fannie Mae or Freddie Mac and you opt for a payment arrangement post-forbearance, you’ll need to make a minimum of three on-time payments under the new plan before you are eligible to refinance.
If the loan is backed by the FHA, VA or USDA, you should contact your lender to find out your options.
Although originally set to expire on September 30, 2021, you may still request an initial COVID hardship forbearance on a FHA, VA, or USDA loan until the COVID-19 National Emergency is officially over. There is currently no deadline for Fannie- or Freddie-backed mortgages.
Explore All Your Options
If you’re trying to make your mortgage payments more manageable, refinancing is just one option. There are additional alternatives you can consider.
First, you can ask your lender for a loan modification. This involves making an arrangement with your lender to permanently alter the terms of your loan. Typically, they will lower the interest rate and/or extend the repayment term to lower monthly payments. In some cases, the lender may discharge a portion of the principal amount owed.
If you’re still in your initial 12-month forbearance period, you can also request up to two three-month extensions. This extra time could give you the breathing room needed to get back on your feet and resume regular mortgage payments.
Finally, if you aren’t able to work out a new plan that allows you to keep your mortgage, the solution may be to sell your property.
“I’ve spoken to a number of borrowers who had equity in their properties and fell behind,” said Kevin Leibowitz, owner of Grayton Mortgage in Brooklyn, New York, in an email to The Balance. “If the debt is more than you can handle based on current and future income, then get out,” he said. “The [missed payments] will net out against the equity that you have in the property—so sooner is better than later.”
Frequently Asked Questions (FAQs)
When does mortgage forbearance end?
The initial forbearance period lasts for 12 months. However, if you need additional time off from mortgage payments, you can request up to two three-month extensions. The maximum amount of time you can remain in forbearance is 18 months.
Can you refinance a mortgage with bad credit?
Refinancing a home with bad credit isn’t impossible, but it’s typically not easy. One option is to pursue a government-backed refinance, such as one through the FHA or VA, which typically allows for lower credit scores. You can also consider enlisting a co-signer or working with a non-traditional lender that specializes in manual underwriting or working with credit-challenged borrowers. If you aren’t sure about the best option, it can help to work with a mortgage broker.