Does mortgage forbearance affect refinancing? What homeowners need to know

Understanding forbearance

Forbearance is a pause or reduction in your monthly payment during a hardship. The terms are based on your agreement with your servicer, but these are typically aimed at providing short-term relief, often for 3 – 6 months. You work with your servicer to qualify for an option to pay back your past-due payments after the forbearance.

You’ll need to be approved for a forbearance by your servicer. A forbearance should only be used if you’ll have the funds to reinstate at the end of the forbearance term. If you don’t reinstate, you'll immediately be that number of payments past due. So if you accept a 6-month forbearance and make no payments, you'll be due for 6 months and foreclosure proceedings can start immediately.

Because of this and the probable impact on your credit, forbearance isn’t right for everyone who’s struggling to make their payments. Fortunately, servicers may be able to qualify you for other avenues of relief, including repayment plans, loan modifications, partial claims, or deferrals of payments. Some of these may be used in combination with each other.

Does forbearance impact your credit score?

Mortgage forbearance will impact your credit score, but if you were current leading up to the forbearance, that may be helpful. If you were already late on a payment or two before requesting forbearance, that has a negative impact on your score. Forbearance also doesn’t eliminate debt, so you have to keep on top of both your repayments and your mortgage payments moving forward to maintain your credit score.

Servicers are required to report accurately to credit bureaus, and if your total loan balance is not decreasing because you’re in forbearance, that can and will impact your credit score.

However, if you agree to a reduced payment during forbearance and miss the payment, that will be reported. Missed payments stay on your report for up to 7 years. Not all late payments are the same. Payments 60 – 90 days late are worse than 30-day late payments. Time tends to heal credit scores as well as old wounds. The older a late payment is, the more marginal the impact on your credit score.

Because a forbearance in itself isn’t considered negative, a notation about it may stay on your credit for the life of the loan. However, this is preferable to things that have a negative impact on your score, such as late payments and foreclosure.

Forbearance vs. deferment

When described, forbearance of payments and deferment can sound very similar, so let’s break down the difference.

• Forbearance: Forbearance is a temporary pause or lowering of your monthly payment. At the end of the forbearance the missed payments must be repaid.
• Deferment: Deferral, or deferment, is an option for paying back past-due payments. In a deferral, a limited number of payments can be moved to the back end of the loan to be due when you pay it off.
• Partial claim: A partial claim is functionally the same as a deferral, but the payments at the end of the loan are a secondary lien to be paid off. Some investors do these instead of deferrals.

Can you refinance if you are in forbearance?

Forbearance typically has a negative impact on your ability to refinance. When you're on forbearance, it's reported on your credit and has a negative impact on your credit score, with very few exceptions. The biggest exemption to an impact on one's credit score is if the forbearance came about as a result of the aftereffects of a natural disaster. These are considered noncredit impacting. Officials may be required to declare a state of emergency for special assistance to become available.

If you otherwise qualify based on your credit score and other factors, you may be able to reinstate your loan through a cash-out or rate-and-term refinance if you're applying for a conventional loan through Fannie Mae or Freddie Mac or a Jumbo Smart loan from Rocket Mortgage^®.

How to refinance your mortgage after forbearance

Aside from the situations we’ve talked about above, most of the time you’ll be refinancing after you’ve already completed forbearance based on negative credit impacts. Most traditional forbearances outside of those authorized in natural disaster situations have a negative impact on credit. Forbearance doesn’t have to be a forever stain on your credit report, but there are several things you should do in order to make sure you’re ready to qualify.

Get current or keep up with post-forbearance payments

To start, make sure that you are either current on your loan or keeping up with the payments under any post-forbearance workout plan that you might have. For starters, missed payments hurt your credit, which may or may not already be lower due to the forbearance.

In addition, you often have to make a minimum number of payments in order to qualify to refinance. For conventional, FHA rate/term and certain Jumbo Smart loans, you’ll need to make three payments before you can refinance. For FHA cash-out transactions, a year’s worth of payments are required.

Work on your credit score

Natural disaster forbearances are non-credit impacting, so the forbearance shouldn't have an impact.  If you have another mortgage servicer and have questions about forbearances and credit impact, you will want to reach out directly to them.

On the other hand, forbearances outside of these special exemptions will likely be reported as delinquencies by lenders because you’re not repaying according to the original terms of the loan at that point. This can hurt your credit score.

There are a couple of things you can do to make sure you get your credit back in shape before you know it. The first is to make sure you keep up with any payments you have once the forbearance is over for all accounts. You’ll also want to avoid taking on a bunch of new credit and debt. That’s a sign for lenders that you may be stretching your budget and can hurt your score.

Finally, you’ll want to pay down debt in general, but let’s get to that next.

Keep debt in check

One of the key metrics lenders use to determine whether you can qualify for a mortgage is your debt-to-income ratio (DTI). This compares your monthly debts to your gross monthly income – pretax – and expresses the result as a percentage.

There are two different types of DTI, front-end and back-end. Front-end DTI, also called housing expense ratio, is your monthly mortgage payment including principal, interest, property taxes, homeowners insurance and (if applicable) homeowners association (HOA) fees. Here’s the equation:

Principal + Interest + Property taxes + Homeowners insurance + HOA fees

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Gross monthly income

Let’s say you make $60,000 per year. That’s $5,000 per month. If your all-in mortgage payment is $1,200 per month, your housing expense ratio is 24%. Not all types of loans take into account the front-end ratio, but it’s used with FHA, USDA and VA loans in certain circumstances. Anything 28% or lower is pretty good.

The other ratio to consider is the back-end ratio. That’s a little simpler. It just takes monthly payments on installment debts and adds them to minimum payment on credit cards and other lines of credit compared to your gross monthly income.

Installment debt + Revolving debt

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Gross monthly income

As a quick example, let’s assume the same $5,000 monthly income and keep the $1,200 mortgage payment. Then add $100 in minimum payments between a couple of credit card accounts, $400 in student loan payments and a $300 car payment. That’s a 40% DTI. Everyone is different, but you generally want to keep this under 43% to qualify for most loan options.

An important thing to keep in mind is that when you’re having financial trouble, as you would be if you needed a forbearance, it can be very easy to run up things like credit card debt to pay for expenses. If you’re not careful, those things can get out of hand. So, if you’re thinking about refinancing, it will be important to work toward paying down debt.

The bottom line

It’s possible to refinance shortly after and even during forbearance in some cases. However, you have to meet conditions to show that you’re in good financial shape either during or after the forbearance for this to be possible. In order to refinance, you’ll want to keep up with payments, boost your credit score and minimize your debt.

If you’re ready, get started by applying for a mortgage refinance online today.