Does Mortgage Forbearance Affect Refinancing? What Homeowners Need To Know

When you take on a mortgage, you will always expect to be able to make the payment, but things don't always go to plan. If you're in need of assistance during a temporary hardship or loss of income, a forbearance could allow you to pause or reduce your payment while you get back on your feet.

While forbearance provides a necessary support for those who need it, it’s natural to wonder about the long-term effects. For example, you might be asking yourself, “Does mortgage forbearance affect refinancing?”

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 Does Forbearance Affect Refinancing Specific Loans?

Forbearance has a major effect on your ability to refinance. The exact effects depend on the type of loan you’re looking at in your refinance.

• FHA Loan: If you’re refinancing into an Federal Housing Administration (FHA) loan, you can do so immediately if you’ve exited forbearance and made all your contractual payments during the forbearance. If you missed any payments, there are waiting periods. For a rate/term refinance, you have to have made three consecutive payments under your workout plan or a year’s worth of payments if it’s a cash-out refinance.
• VA Loan: Eligible service members, veterans and surviving spouses may refinance in order to bring the loan current either after exiting forbearance with a Department of Veterans Affairs (VA) loan if they qualify. There are various VA seasoning requirements, so we recommend speaking with a Home Loan Expert.
• Jumbo Loan: A Jumbo Smart loan is possible if you continue to make your payments during the forbearance or if you made up all payments missed during forbearance before you close your new loan. Alternatively, if the forbearance was on a prior home and you’ve now sold the home to pay off the loan, you’re eligible. If you’re in a workout plan, there are a couple of other options that apply. If you had a repayment plan, it must be completed before you can close on a Jumbo Smart loan. If you completed deferral, you would need to make three consecutive on-time payments post forbearance before you could apply. If you’ve completed a modification, different requirements apply, and we recommend speaking with a Home Loan Expert.

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.