Can you refinance a mortgage that is in forbearance?

By Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

Edited by Michael Jensen, Mortgage and Finance Guru

Updated January 12, 2021

If your mortgage is in forbearance due to COVID-19 financial hardship or other reasons, you may be wondering if you can refinance to take advantage of low mortgage rates. For example, if you lost your job or were furloughed but you have returned to work and can resume paying your mortgage, you may want to refinance to lower your monthly payment.

In short, if your mortgage is or was in forbearance, you are typically required to make at least three on time monthly payments before you are eligible for a refinance.  Additionally, you are required to bring the loan current, including paying the amount of the forbearance, when your refinance closes.

For example, if your mortgage was on pause for three months and your monthly payment is $2,500, the amount of your forbearance is $7,500.  In this case you need to pay your current lender $7,500 either with personal funds or potentially with proceeds from your refinance.  Paying off the amount of forbearance usually occurs simultaneous to your refinance closing and your new mortgage funding.

We should note that you only need to bring your loan current if you want to refinance. If you simply want to start paying your mortgage again, you do not need to pay the missed payments in most cases.

The requirement to pay your mortgage for several months may come as a surprise to many borrowers who want to refinance right when they resume their payments.  On the other hand, because forbearance-related missed payments are typically structured as an extension to your current loan or as a subordinated lien, it should come as less of a surprise that you need to repay the forbearance when you refinance and pay off your original mortgage.

In all cases you can use your personal funds -- by contributing additional cash at closing -- to repay the forbearance.  You may also be able to use proceeds from the refinance to pay the forbearance balance.  In this scenario, the mortgage should still be classified as a rate and term refinance, as opposed to a cash out refinance, which means you are eligible for better mortgage terms, including a lower rate. 

Use ourMORTGAGE REFINANCE CALCULATORto determine how much money you can save by refinancing and how quickly you can recover your closing costs

It is important to highlight that most mortgage forbearances related to COVID-19 do not require you to pay any penalties or late fees so that should lessen your financial burden. Additionally, your credit score should not be affected because your payments were suspended, which is beneficial when you apply for the refinance. Usually, a late or missed mortgage payment causes your credit score to drop, but not in this case.

Although the forbearance should not impact your credit score, it usually appears on your credit report so lenders are aware of the missed payments.  The amount of the forbearance also appears on your mortgage statement, typically as a subordinated lien.

The good news is that the mortgage industry guideline that dictates that you cannot qualify for a refinance if you missed a payment within the past twelve months does not apply to COVID-19 related forbearances. This more flexible guideline should enable more people to refinance as they return to the workforce and recover financially.

As long as you have made the required number of mortgage payments and you meet the lender’s other qualification requirements for your credit score, debt-to-income ratio and employment history, you are well-positioned to be approved for the refinance. You also need to have sufficient equity in your home to pay off your current mortgage balance, the amount of the forbearance and any other property liens while staying below the lender’s maximum loan-to-value (LTV) ratio.

If your mortgage was in forbearance as a result of COVID-19 and you would like to refinance, we recommend that you contact multiple lenders below to confirm their qualification guidelines and to compare loan terms. They can review the steps you need to take to bring your mortgage current. Plus, shopping several lenders is the best way to save money when you refinance.

Sources

“Selling Loans in Forbearance Due to COVID-19."  Lender Letter LL-2020-06.  Fannie Mae, July 31 2020. Web.