Refinancing After Forbearance: Here’s What You Need to Know

Article Summary:

Refinancing your mortgage after a forbearance can be a way to lower your monthly payments. But refinancing isn’t right for everyone, and you’ll have to meet certain requirements before you are eligible.

Homeownership is the American dream for many families. Unfortunately, that dream can be threatened if you face financial hardship after you buy a home. After all, what happens if you lose your job and can no longer make your monthly payments?

Each year, thousands of homes are foreclosed upon when homeowners stop making their mortgage payments. And unfortunately, foreclosures have increased considerably in 2022 — they’re up 39% from the last quarter of 2021 and 132% from April 2021.

The good news is that if you can’t make your mortgage payments, foreclosure isn’t your only option. Homeowners also have the option of entering into mortgage forbearance, which temporarily pauses their payments. And when forbearance ends, many homeowners find themselves wondering if they can refinance their mortgage to lower their monthly payments.

How mortgage forbearance works

Mortgage forbearance is a temporary pause of your mortgage payments, usually due to economic hardship such as a serious illness or job loss. A forbearance period usually lasts for three to six months but can be extended for up to a year.

Forbearance doesn’t mean you’re off the hook for your mortgage. You’ll still have to pay back the full amount. Depending on the agreement, your missed payments may either be added to the end of your mortgage term or even due in a lump-sum payment when your forbearance ends.

Forbearance has always been an option offered by mortgage lenders, and the federal government made it even easier to refinance during COVID-19. For borrowers with loans backed by Fannie Mae, Freddie Mac, the FHA, the VA, or the USDA, forbearance was available for up to 18 months.

Refinancing after forbearance

Mortgage refinancing can be appealing if you’re facing financial hardship and are currently in forbearance since it allows you to lower your monthly payment. But generally speaking, you can’t refinance while you’re still in forbearance. Instead, you’ll have to wait until your forbearance period ends.

How soon you can refinance your loan after forbearance depends on the type of loan you have. Before COVID-19, homeowners were required to wait at least 12 months to refinance their loans. Luckily, updated rules allow you to refinance even sooner.

  • Fannie Mae or Freddie Mac. You can refinance a loan backed by Fannie Mae or Freddie Mac once you’ve made at least three on-time consecutive payments after your forbearance. To refinance during your forbearance period, you must have continued to make your payments and be current on your loan.
  • FHA. You can refinance an FHA loan immediately after forbearance for an FHA streamline refinance or after three on-time consecutive payments for a traditional refinance. You’ll have to wait a full 12 months for a cash-out refinance.
  • USDA. You can refinance a loan backed by the USDA after three on-time consecutive payments as long as your loan originally closed at least 12 months earlier.
  • VA. You may be able to refinance a VA loan immediately after forbearance, as long as you can show you’ve recovered from the financial situation that led you to request forbearance.

Pro Tip

You can technically refinance a mortgage backed by Fannie Mae or Freddie Mac while you’re in forbearance, but only if you continue to make your monthly payments.

How to refinance your mortgage after forbearance

If you’re considering refinancing your mortgage after forbearance, it’s important to make sure you meet the requirements. Start by having a conversation with your loan servicer to find out if you’re eligible.

Once you’ve confirmed your eligibility after forbearance, here are the steps you can follow to refinance your loan:

  1. Check your financial situation. You requested forbearance for a reason, and it’s important to make sure your finances are back on track. First, check your credit score to ensure you’ll qualify for a new loan and will have access to competitive interest rates. Additionally, make sure you have a reliable source of income and that your debt-to-income ratio (DTI) meets the requirements for the type of loan you want.
  2. Shop around for a mortgage. Once you’re confident you’ll qualify for a new loan, it’s time to start shopping around. You can refinance with your current lender, but don’t necessarily have to. It’s best to get preapproval offers and interest rates from several mortgage lenders to ensure you’re getting the best deal on your new loan.
  3. Complete your mortgage refinance application. Once you’ve found the best deal, you can officially apply for your new loan. The process of applying for a refinance mortgage is essentially the same as applying for your original mortgage. You’ll have to go through the underwriting process, provide financial documents, and possibly have another appraisal done on your home.

Still searching for a lender? Check below to compare mortgage refinancing lenders from multiple states and financial institutions.

Should you refinance your mortgage after forbearance?

Even if you’re eligible to refinance your loan, it’s worth asking whether it’s the right decision.

There are a few primary reasons someone might refinance their mortgage, including reducing their monthly payment, reducing their interest rate, or switching between a fixed-rate and adjustable-rate mortgage.

Are you able to get lower monthly payments?

When you refinance your mortgage to one with a lower interest rate, not only will it save you money over the life of the loan, but it will also help lower your monthly payment. You can lower your payment even more by taking out a new 30-year loan, which essentially stretches out your payments. And a lower payment can be appealing for someone who is recently bouncing back from economic hardship.

But not everyone will be able to lower their interest rate or monthly payment. In 2020 and 2021, mortgage rates were at some of their lowest levels ever, thanks to action from the Federal Reserve. Many homeowners took advantage of those low rates to refinance their mortgages.

But in 2022, interest rates are on the rise and are higher than they’ve been in years. Depending on when you borrowed your initial mortgage, there’s a good chance you could get stuck with a higher interest rate.

Does it make sense to refinance?

The final thing to consider when deciding whether you refinance your mortgage is how long you plan to stay in the home. Refinancing your mortgage comes with closing costs, meaning it could take a while for the move to pay off. You can determine if refinancing makes sense by calculating your break-even point, which is the point at which the amount you’ve saved by refinancing outweighs the cost of refinancing.

Ultimately, if you only plan to stay in the home for a couple more years, refinancing may not be worth the upfront costs you’ll be stuck with.

Pro Tip

It’s also worth considering your financial situation. If you’ve recently faced a hardship, there’s a good chance your credit score has taken a hit. Unfortunately, this may result in you getting a higher mortgage interest rate or even not being able to qualify for a mortgage at all.

Alternatives to refinancing your mortgage

If you decide refinancing isn’t right for you, there are other alternatives to consider. One of the best alternatives for someone who wants to lower their monthly payment is a mortgage recast.

When you recast your mortgage, your lender will re-amortize your loan using the same interest rate and loan term. Because the loan is being re-amortized with a lower principal balance, you’re likely to end up with a lower monthly payment.

There are several benefits to recasting your mortgage. In addition to lowering your monthly payment, you also avoid the requirements of qualifying for a new mortgage. Additionally, if you have a competitive interest rate on your loan currently, you’ll be able to keep it.

That being said, there are some downsides to recasting your mortgage. First, if you have a high interest rate, recasting your loan doesn’t allow you to lower it. Recasting also usually requires a lump-sum payment upfront, which can be as cost-prohibitive as the closing costs of refinancing.

Improving your finances

Another alternative to refinancing and recasting your mortgage is to spend time focusing on improving your finances. By taking time to increase your credit score, boost your cash reserves, and generally get your finances back on track, you may have a better chance of qualifying for a refinance, and at a better interest rate.

What to do if you still can’t make your mortgage payments

Unfortunately, some borrowers may reach the end of their forbearance and find they still can’t reliably make their monthly mortgage payments. If that’s the case, there are still some options available to you.

First, consider requesting a forbearance extension. Depending on your financial circumstances, your mortgage servicer may allow you to pause your payments for a longer period.

Another option available is to ask your lender about loan modification. Using loan modification, your lender can agree to lower your mortgage payment, lower your interest rate, or extend your loan term. Each of these moves can make your payments more affordable. And unlike refinancing and recasting, you won’t be stuck with any closing costs or lump-sum payments.

A final option if you still can’t make your mortgage payments is to sell your home and pay off the loan. This option won’t be appealing to most homeowners, but it may be the only option. It’s better to proactively sell your home to pay off your loan than to wait for your lender to foreclose, as a foreclosure can have a drastic effect on your credit score.

Key Takeaways

  • Mortgage forbearance is a temporary pause of your mortgage payments, usually due to financial hardship.
  • It used to be that you had to wait at least a year after forbearance to refinance your mortgage. As of 2022, however, you can often refinance within three months, provided you’ve made three consecutive payments.
  • To refinance your mortgage after a forbearance, check with your lender to ensure you qualify. Then, shop around for the best interest rates.
  • Refinancing your mortgage after forbearance may help you lower your interest rate or monthly payment, but that’s not always the case.
View Article Sources
  1. U.S. Foreclosure Activity Sets Post-Pandemic Highs in First Quarter of 2022 — PR Newswire
  2. Learn about forbearance — Consumer Financial Protection Bureau
  3. What Is a Mortgage Forbearance Agreement? — SuperMoney
  4. Can I Refinance My Reverse Mortgage? — SuperMoney
  5. A Complete Guide To Home Mortgage Foreclosure — SuperMoney
  6. Expert Guide to Refinancing Your Loans — SuperMoney
  7. Best Mortgage Refinance Lenders | July 2022 — SuperMoney