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How to refinance after exiting COVID mortgage forbearance

Casey Morris
The Mortgage Reports contributor

Can I refinance if I used mortgage forbearance?

If you put your mortgage in forbearance during the first wave of COVID-19, you’re probably thinking about what comes next once your payments resume.

With mortgage rates at historic lows, you may want to refinance to reduce your monthly payments and make your loan more manageable. 

The good news is, refinancing after forbearance is generally allowed. But there are special rules to be aware of.

Here’s what you need to know.

Verify your refinance eligibility (Dec 3rd, 2020)

Is now a good time to refinance? 

For those who are eligible, it’s a great time to refinance.

Data firm Black Knight recently found that 2.5 million homeowners could save $500 a month or more by refinancing. And millions more could reduce their payments by at least $299.

That’s because mortgage rates have hit record lows ten times in 2020, opening the door to substantial savings. 

If your credit score and income have improved since you first took out your mortgage, you may qualify for a much better interest rate than you received on the initial loan.

That means you could save money on interest and have more cash on hand each month. 

If you’re coming out of forbearance and are worried about being able to afford your payments once they resume, a mortgage refinance can also ease the transition and help you keep your finances steady.

Verify your refinance eligibility (Dec 3rd, 2020)

How soon can I refinance after exiting forbearance? 

Your refinance timeline depends on the type of mortgage you have.

If you have a conventional loan backed by Fannie Mae or Freddie Mac, you must make three consecutive payments after you’ve exited forbearance before you become eligible for refinancing.

Prior to COVID-19, homeowners had to wait 12 months after forbearance before applying for a refinance. The revised rules give borrowers who struggled financially during the pandemic access to lower rates, thereby getting further economic relief.

But different terms may apply if you have a government-backed loan, including FHA, VA, and USDA mortgages. 

  • Borrowers who have FHA mortgages won’t have to make a lump sum payment post-forbearance. Instead, lenders may give these borrowers second liens that they will repay when they sell the home or when they refinance, according to the Consumer Financial Protection Bureau (CFPB)
  • VA borrowers may be eligible for a loan modification plan after forbearance
  • USDA borrowers may qualify to have their back payments added to the end of their loans

If you have one of these loans, it’s best to contact your lender and ask what your options are and when you can apply to refinance.

How to refinance after forbearance

There are several steps to take if you think refinancing after forbearance is the right decision for you:

1. Review your options with your current lender. 

Your loan servicer can help you determine whether refinancing makes the most sense for you, especially given closing costs and other fees.

If your finances are still tight, they may be able to revise your repayment plan or reduce your monthly payments on your current loan.  

2. Compare refinance offers

If you decide to refinance, request quotes from several different lenders. It’s always important to compare interest rates, terms, and overall costs to determine who will give you the best loan deal. 

Compare refinance offers (Dec 3rd, 2020)

3. Make sure you can afford the new loan

Before committing to anything, you want to math out how much you’ll be paying each month and whether you can afford a new loan.

You can use a mortgage refinance calculator to compare your current loan and rate against a new one to make sure you’ll be saving money in the long run and can afford the new payments. 

4. Apply for a refinance

Once you’ve decided on a lender and feel confident that you can handle the new loan, complete your refinance application.

It’s a good idea to pay down smaller debts beforehand and make sure all of your credit card and other loan accounts are current before applying.

The better your credit, the better your chances of being approved and securing a low interest rate. 

Is a refinance the right move for you? 

Coming out of mortgage forbearance can be financially challenging, especially if you’re still catching up after a layoff or reduction in your income.

Refinancing your home can ease the burden as you rebuild your finances, and it can provide some breathing room as you navigate the continued uncertainty of the pandemic.

Lower monthly payments mean more cash available for an emergency fund or unexpected expenses. Plus, you may be able to roll your closing costs into the loan if you don’t have much cash on hand, which lowers the barrier to entry. 

But refinancing isn’t right for everyone.

If you feel you’re still on shaky ground because of the pandemic, you may want to explore a forbearance extension or other repayment options through your lender. 

The strongest refinance candidates also have strong credit and at least 20% equity in their homes, so consider your overall financial profile.

If you recently purchased the house with a low down payment or your credit took a hit during COVID, it might be better to focus on raising your score and gaining more equity before trying to get a new loan. 

Other options after forbearance ends

Refinancing isn’t your only option. Here are a few ways you can approach the end of forbearance

  • Resume payments at the original rate. If you’re confident that you can make your mortgage payments in full, you can pick up where you left off by paying the same monthly amount. However, you’ll also need to make arrangements to cover the payments you missed during the forbearance. You may be able to spread these out over the next year or extend the repayment period on your loan so you don’t have to come up with the back payments as a lump sum
  • Apply for an extension. You can apply for a six-month extension of your forbearance if you are still struggling financially and cannot afford to resume your mortgage payments yet
  • Sell the home and pay off the loan. Perhaps months of quarantine and work-from-home have you thinking about relocating to a city with a lower cost of living. Selling your home to pay off your mortgage can free up cash for a move and allow you to purchase a less expensive house at a lower interest rate
  • Refinance your mortgage. Refinancing enables you to stay in your home and get back on track with your mortgage payments, but with a potentially lower interest rate. Not only will a lower rate save you money, but the repayment term will likely be extended, leading to lower monthly payments

The right decision for you will depend on your current loan and how your finances are looking as you exit COVID mortgage forbearance.

Your loan servicer should walk you through all your options before forbearance ends, so you can be sure you’re making the best choice about how to resume your mortgage.

Refinance rates should stay low, so you don’t have to refi right now

The good news is, refinance rates are likely to stay low for the next several years. So you won’t necessarily miss out if you wait to apply. 

Rather than getting caught up in what rates are today and what other homeowners are doing with their mortgages, focus on taking the next best step for you as you come out of forbearance — whether that’s refinancing or not. 

Verify your new rate (Dec 3rd, 2020)