Can you refinance a mortgage while in forbearance?

On March 27, 2020, the federal government approved the Coronavirus Aid, Relief and Economic Security (CARES) Act, a $2 trillion relief package aimed to provide immediate help to families, small businesses, workers and homeowners.

Millions of homeowners took advantage of the CARES Act’s forbearance provision. The term mortgage forbearance refers to a repayment plan that allows homeowners to lower or pause mortgage payments for a set time. Lenders will typically grant you a forbearance if you suffer an injury or illness, lose your job or are affected by a natural disaster. Typically, you must repay your missed payments immediately.

This provision allows homeowners to suspend their monthly mortgage payments temporarily. While this helps many homeowners alleviate financial stress, others are still struggling. If you’re a homeowner with forbearance, you may wonder if you'll have trouble borrowing more money in the future. Here are a few things to know.

Can you refinance while in forbearance?

The short answer: Yes. But if you want to refinance your mortgage or take out a personal loan, you could have difficulty getting approved. Refinancing a home after a forbearance is particularly hard, as most lenders won’t even consider a refinance application for at least a year after the end of forbearance.

In May, the Federal Housing Finance Agency announced homeowners can qualify for a refinance after three months if they make three months’ worth of payments on time. This means you could take advantage of record-low interest rates to reduce your monthly payments. If you have a clean credit history, you should be able to qualify for other loans and credit cards as well.

As soon as your forbearance ends, or shortly before, contact your mortgage lender. Your lender doesn’t want the home to go into foreclosure (it’s expensive and takes a lot of time). Since many people are facing financial hardships right now, many lenders are happy to work with homeowners. In addition to refinancing for a lower rate, you may be able to extend your forbearance or adjust the terms of your loan.

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Is mortgage forbearance bad for your credit?

While a forbearance can provide immediate relief to tight budgets and help owners avoid foreclosure, it typically does affect credit scores. Traditionally, mortgages in forbearance are reported as delinquent since they don’t meet the original repayment terms. However, the CARES Act prevents lenders from recording a homeowner’s mortgage as delinquent while they are in forbearance if it's due to COVID-19.

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What is mortgage forbearance under the CARES Act?

The CARES Act allowed homeowners to skip monthly mortgage payments for up to 180 days (6 months). Homeowners were not required to submit documentation proving their hardship. If you need to, you could apply to extend the forbearance up to an additional 180 days.

Further, you could shorten the forbearance period if you decided you could continue making mortgage payments. Lenders were required to report all accounts in forbearance as current unless your loan was delinquent before you went into forbearance.

Once the loans leave forbearance, repayment plans vary based on the type of loan. Homeowners with an FHA, VA, or USDA loan are not required to make a lump sum repayment following forbearance. Lenders are working with homeowners to establish affordable repayment options, including extending repayment terms to the length of the forbearance. If you have a private loan, you should talk to your lender about future repayment terms.

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