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 need to bring your loan current before you are eligible for a refinance. So if your mortgage was on pause for three months and your monthly payment is $2,500, you need to pay your current lender $7,500 in addition to the payment that is due for the current month.
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 bring your mortgage current may come as a surprise to many borrowers because forbearance-related missed payments are typically structured as an extension to your current loan or as a subordinated lien that you do not need to repay until you pay off your loan.
Even though you pay off your outstanding mortgage balance in full when you refinance -- including any forbearance-related liens -- you are required to bring your loan current first. You are required to use your personal funds to bring your mortgage current and you cannot use proceeds from the refinance, even if you are taking cash out with the new loan.
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 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 your mortgage is current 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 and any other property liens and stay below the lender’s maximum loan-to-value (LTV) ratio.
If your mortgage was in forbearance as a result of COVID-19 but 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.
“Selling Loans in Forbearance Due to COVID-19." Lender Letter LL-2020-06. Fannie Mae, July 31 2020. Web.