Can You Refinance a Mortgage in Forbearance? | Mortgages

If you want to refinance your mortgage but you’re enrolled in a forbearance program, you will first need to end the forbearance and then meet certain conditions.

Refinancing involves paying off your original loan and taking out a new loan with new terms. If you can reduce your interest rate or lengthen your repayment period, your new mortgage payment may be easier to manage.

Canceling your mortgage forbearance plan and refinancing could put your home loan back on track. Here’s what you need to know.

Mortgage forbearance is an agreement between you and your loan servicer or lender that temporarily pauses or reduces your mortgage payments. The bank also agrees not to start foreclosure proceedings during this time.

Forbearance agreements eventually end, though, and homeowners might be stuck with expensive mortgage payments just as they’re getting back on their feet.

“The homeowners will also need to make up the missed payments,” says Ed DeMarco, president of the Housing Policy Council, a trade group representing mortgage lenders and servicers. “These missed payments may be deferred to the end of their mortgage term or may be rolled into the mortgage balance.”

In these cases, a refinance might help. Refinancing “creates an opportunity for many homeowners to reduce their monthly mortgage payments or shorten their loan term, either of which may reduce risk for the borrower and the lender,” says DeMarco.

If you have a loan backed by Fannie Mae or Freddie Mac, or by the FHA, USDA or VA, here is what you need to know:

Borrowers can refinance after a forbearance, but only if they make timely mortgage payments following the forbearance period.

If you have ended your forbearance and made the required number of on-time payments, you can start the refinancing process. Here’s what you’ll want to do.

Eligibility for refinancing your mortgage depends largely on your financial situation. Lenders generally look for a credit score of at least 620, which falls in FICO’s fair range, and a debt-to-income ratio of no more than 43% for conventional loan refinancing.

But many lenders have ramped up their requirements. Qualifying for a refinancing can sometimes be tough, says Karen Solgard, a loan consultant with New American Funding, a national mortgage lender.

“Lenders are really looking for signs that the borrower may be headed to a forbearance request,” says Solgard. “I have been seeing that credit scores below 700 will make the interest rate go up considerably, unless there is at least 40% equity in the property.”

Compare interest rates, annual percentage rates, estimated monthly payments and closing costs.

“Check interest rates to see if they are about 1% lower than your current rate,” Solgard says. If so, there may be a benefit to refinance.

The refinance might even work in your favor with a shorter loan term, especially if you’re getting rid of mortgage insurance, she adds.

“I am seeing an advantage for some borrowers to refinance to a 15-year (term) to get a lower interest rate,” Solgard says. “If there is plenty of equity in the property, and they are switching from FHA (with) mortgage insurance to a conventional 15-year (mortgage), the payment is nearly the same.”

But if you’re unable to find interest rates lower than your current mortgage rate, you may have other options.

Refinancing isn’t the only option if you need a more manageable mortgage payment. With interest rates rising appreciably between 2022 and 2024, it’s becoming more difficult for many borrowers to achieve a rate reduction via refinancing.

Instead, you can request a loan modification, sell your home or stay in forbearance. You may also be able to receive help via homeowner assistance funds or supplements.

Here’s more about each of these choices.

This is an arrangement you make with your lender to permanently change your loan terms. The lender could lower your interest rate, lengthen your loan term or, in rare cases, forgive some of your principal.

A loan modification might be a good option if you don’t qualify to refinance or can’t afford closing costs.

“A lender really wants people to be able to keep making monthly payments, even if it is at a reduced amount,” Solgard says. “The homeowner needs to project their budget out into the future. If they really can’t afford to pay the current mortgage, they may have trouble refinancing as well, and the loan modification is the only option.”

Consider your income and your expenses for the foreseeable future. If you think you’ll have trouble making payments because money is tight but you have equity in your home, you might want to sell it to avoid a short sale or foreclosure.

But keep in mind that any payments missed during forbearance will probably be due once you sell the home.

The Homeowner Assistance Fund was created to provide up to $10 billion in assistance to homeowners affected by COVID-19, which may include those with mortgages in forbearance. The program began accepting applications in 2022 and expires in 2026 or when the money runs out. Check with your state to see eligibility requirements and availability.

For FHA-backed loans, you may be able to reduce your monthly mortgage payment through Payment Supplement, a program announced by the Department of Housing and Urban Development to provide additional aid to struggling homeowners.

Starting May 1, 2024, Payment Supplement could decrease your monthly payment by up to 25% for three years without the need for a loan modification. Contact your mortgage servicer to see whether this is an option for you.

After three to six months in forbearance, evaluate whether you’re still financially struggling and then call your loan servicer to determine the next steps.

“The servicer may be able to extend the forbearance, but the homeowner must request such an extension,” DeMarco says.

Extending forbearance might be a good idea if you can’t pay your bills and this option is still available to you, Solgard says. Just be sure you have a plan for eventually making up your missed payments.

After exiting mortgage forbearance, you may be able to defer those payments to the end of the loan term, create a payment plan with your loan servicer or modify your loan terms. You can also pay everything back in one lump sum, though your loan servicer can’t require you to.

Ultimately, the guidelines on forbearance and refinancing mean that homeowners don’t have to choose between short- and long-term mortgage relief. If you’ve entered forbearance, refinancing to a lower interest rate is still within reach and can give you more control over your financial future.