Refinance after COVID mortgage forbearance: Rules and process

Casey Morris
Casey Morris
The Mortgage Reports Contributor
July 29, 2021 - 6 min read

Can I refinance after forbearance?

If you took advantage of a forbearance plan offered under the CARES Act, the forbearance period may be ending soon. And you’re probably wondering what comes next.

With mortgage rates near record lows, you may want to refinance. This could reduce your monthly payments and make your home loan more affordable.

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.

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How soon can I refinance after exiting forbearance?

Your refinance timeline depends on the type of mortgage loan 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.

Different terms may apply if you have a government–backed loan, including FHA, VA, and USDA mortgages.

  • FHA loans – According to the Federal Housing Administration, you must have made at least 3 consecutive payments after exiting forbearance to be eligible for most FHA refinances. Some borrowers using the FHA Streamline Refinance may qualify with fewer than 3 payments. To refinance with cash back, you’ll need to have made at least 12 consecutive payments post–forbearance
  • USDA loans – If your current mortgage is a USDA loan, you must have made 3 consecutive payments after exiting forbearance to be eligible for a refinance. In addition, the loan must have originally closed at least 12 months prior to the date you request a refinance (meaning you bought the home or last refinanced at least a year ago)
  • VA loans – There is no waiting period for a VA IRRRL (Streamline) Refinance, as long as the borrower can prove they’ve recovered from the financial situation that caused them to request forbearance in the first place

Prior to the coronavirus pandemic, homeowners had to wait 12 months after using a forbearance program to apply for a refinance.

The revised rules give borrowers who experienced financial hardship access to lower rates, thereby getting further economic relief.

Keep in mind that any missed payments from your forbearance period still need to be made up. There are multiple repayment options, so ask your servicer what to expect. Depending on your repayment plan, forbearance may or may not affect your ability 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 options with your mortgage servicer

Your loan servicer – the company to which you make monthly mortgage payments – can help you determine whether you’re eligible to refinance after forbearance.

Before you can refinance, you must have exited your forbearance plan and made at least 3 consecutive loan payments. If you’re eligible to refinance, your mortgage servicer will need to formally release you from forbearance before you can go ahead with the new loan.

If your finances are still tight, on the other hand, your servicer may be able to revise your repayment plan or reduce the monthly payments on your current home loan instead. This is known as a loan modification.

2. Compare refinance offers

If you decide to refinance, request quotes from several different mortgage lenders.

Keep in mind that different lenders have different requirements to refinance. Depending on your current financial situation, it may help to look for a lender that’s more lenient about credit scores or debt–to–income ratios, for example. Some lenders can provide extra leeway for borrowers who are still experiencing hardship.

It’s always important to compare interest rates, terms, and overall costs to determine who can offer the best deal on your new mortgage.

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. Complete your refinance application

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 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 current lender.

The strongest refinance candidates also have good credit and at least 20 percent 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 up any missed payments from the forbearance period. A lump sum payment is never required; instead, borrowers can repay the amount along with their regular monthly payments, or opt for a payment deferral and make up the missed amount when they sell their home. Note that if you opt for deferral and then decide to refinance, you will likely have to repay the missed amount when you refi
  • Apply for a forbearance extension. Many homeowners can apply for a three– or six–month forbearance extension if they are still struggling financially and cannot afford to resume mortgage payments yet
  • Ask about loan modification – In some cases, loan servicers can help in–need borrowers by lowering their mortgage interest rate or extending their loan term to make payments more affordable. Unlike a refinance, loan modification does not involve closing costs. It’s meant to be a last–resort form of mortgage relief
  • 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

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 at least through the end of the year. 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 involves refinancing or not.

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