Refinancing After Forbearance – Here Are The 2022 Rules

Does Loan Forbearance Affect Refinancing?

Have you taken advantage of the forbearance program offered under the CARES Act? If so, the forbearance period may end soon and you might be wondering what next! Refinancing can reduce monthly repayments and make your mortgage more affordable, especially with mortgage rates still low. Fortunately, you could refinance after forbearance, but you need to be aware of the special rules that affect refinancing after forbearance. This article provides information on what you need to know when refinancing after forbearance.

How Soon Can You Refinance After Existing Forbearance?

It depends on the type of mortgage plan you currently have. For example, if you are having a conventional mortgage backed by Freddie Mac or Fannie Mae, you need to make 3 consecutive payments after you have exited forbearance to become eligible for refinancing. On the other hand, different rules apply if you currently have a government-backed mortgage including VA, FHA, or a USDA loan.

. FHA Mortgages – The Federal Housing Administration states that you should make at least three consecutive payments after existing forbearance to become eligible for FHA refinances. But some borrowers using the FHA Streamline Refinance could qualify for refinancing with fewer than 3 payments. On the other hand, to refinance with cashback, you should make at least 12 consecutive payments after existing forbearance.

. VA Mortgages – There isn’t a waiting period for a VA IRRRL Mortgage (Streamline) Refinance as long as the homeowner proves that he or she has recovered from the financial situation that caused him/her to request forbearance. In fact, before the COVID-19 pandemic, homeowners had to wait for twelve months after using a forbearance plan to become qualified for refinancing.   

. USDA Mortgages – If you have a USDA mortgage, you should make at least 3 consecutive payments after forbearance to become qualified for refinancing. On the other hand, your mortgage should originally close 12 months before the date you request refinancing, which means you purchased the house or last refinanced it at least a year ago. 

The revised rules will give borrowers, who have already experienced financial hardships, access to lower rates and provide further economic relief in the process. But you should know that all missed payments occurring from your forbearance period still need to be made up before you request refinancing. Since there are multiple forbearance options, you should get advice from your service provider as to what you should expect in the process. In fact, depending on your loan repayment plan, forbearance might or might not affect your ability to refinance. 

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How Do You Refinance After Forbearance?

If refinancing after forbearance is the right decision for you, there are several steps that you need to take. 

1. Review your options with your mortgage servicer

The loan servicer or the company that you make monthly mortgage payments could help you determine if you are qualified for refinancing after forbearance. The Mortgage Reports loan expert and licensed MLO – Jon Meyer – states that reviewing your options with your mortgage servicer is crucial. Depending on the circumstances of a forbearance, some loan servicing companies may push missed payments to the back end. They may not show as a forbearance on a credit report. Before refinancing, you need to exit your forbearance plan and make at least 3 consecutive loan payments. Your loan servicer should formally release you from forbearance before you can go ahead with the new loan in case you are eligible for refinancing.

In case your finances are still tight, your loan servicing company can revise your repayment plan or reduce the monthly payments on the existing mortgage, which is known as “Loan Modification.”

2. Compare your refinancing options

If you are qualified for refinancing and you decide to go ahead, you should request quotes from different mortgage lenders in the area. In fact, different mortgage lenders may have different requirements for refinancing. Depending on the current financial situation, you should look for a lender that is more lenient about your credit score or debt-to-income ratio. Some lenders will provide extra leeway for homeowners who still experience economic hardships. In fact, you should compare interest rates, payment terms, and overall costs before you opt for the best deal on your new mortgage loan.

3. Make sure that you can afford the new mortgage loan

The most important thing is to check if you can afford the new mortgage. Use a loan refinance calculator to compare your current mortgage and the rates against a new loan. That way you can make sure that you will be saving money over time and could afford the new payments. You should also double-check your credit score, FICO score, and verify the history of timely payments before applying for the new mortgage. 

4. Completing the refinance application

Once you are confident that you can handle the new mortgage and decide which lender to choose, you should complete the refinance application. You should pay off all credit cards and small debts before applying for the new mortgage. In fact, the better your credit, the better your chances of getting approved for a new mortgage at a lower interest rate.

Is Refinancing Right For You?

Getting out of mortgage forbearance can be quite challenging, especially for homeowners who are still catching up after reductions in income or layoff. Refinancing your home can ease your financial burden as you try to rebuild your finances. It can easily offer some breathing space as you try to navigate the uncertain financial world after the coronavirus pandemic. Lower monthly payments mean you have more cash for unexpected expenses. On the other hand, you may also consider rolling your closing costs into the loan in case you don’t have enough cash on hand. But refinancing may not be right for everyone.

If you are still on shaky ground after the pandemic, you may consider exploring a forbearance extension or other forbearance options via your current lending company. In fact, the strongest refinance candidates should have good credit and a 20% equity in their homes. So you should consider your overall financial profile before opting for refinancing your mortgage loan. 

In case you have recently purchased a home with a low down payment or your credit has taken a hit due to the pandemic, it is better to try to raise your credit score and gain more equity before you consider refinancing.  

Other Options After Forbearance Ends!

Refinancing isn’t the only option available to you. Here are some other options to consider after forbearance ends:

. Resume payments at the original rate – In case you are confident that you could make mortgage payments in full, you can easily pick up where you left off by way of paying the same monthly amount. But you will need to make up for any missed repayments from forbearance periods before the end of the mortgage. You don’t need to make a lump sum payment at all. Instead, you can repay the loan amount along with your regular monthly repayments. If not, you may opt for a payment deferral to make up for the missed amount when you sell the property. But if you opt for deferral and then decide to refinance, you are most likely to have to repay the missed amount when refinancing.

. Apply for a forbearance extension – You can apply for a 3 to 6-month forbearance extension if you are still financially struggling and can’t resume the repayments as yet.

. Ask about loan modification – Some loan servicers can help in-need borrowers by lowering the interest rate and extending the loan term to make their repayments more affordable. Loan modification doesn’t have any closing costs. In fact, it is a last resort form of mortgage relief.

. Sell your property and pay off the loan – Months of work from home and quarantine may make you think of relocating to another city with a lower cost of living. Selling the house and paying off the mortgage could free up cash for your move and help purchase a less expensive property at a lower rate.

The right decision for you may depend on your current mortgage as well as how your current finances are looking – as you exit forbearance.

Your mortgage servicing company will walk you through all of the options before forbearance ends. You should make the best choice possible when deciding to resume your mortgage.

Your Next Steps!

The rates are rising as the American economy recovers. But refinancing rates are still low from a historical perspective. You should focus on taking the next best step for your situation as you come out of forbearance – whether it involves refinancing or some other option.