Does mortgage forbearance affect refinancing?

As a homeowner, you’re not expecting to fall behind on your mortgage, but sometimes an unexpected expense or job loss can impact your ability to pay. Keeping in touch with your mortgage servicer can help you find the right path forward, which may include forbearance.

If you’re currently in forbearance, or were in the past, you may be wondering whether it affects your credit and if you can refinance your mortgage.¹ Forbearance may impact your ability to refinance, but improving your credit and making on-time payments can help you qualify for a new loan.

Key takeaways:

• You can refinance after a forbearance once your loan is current, or in specific instances like natural disaster forbearance.
• Missed payments can impact your credit score, which could influence your ability to refinance.
• You’ll likely need to improve your credit score and pay down your debts before beginning the refinance process.

Understanding forbearance

Forbearance is a pause or temporary reduction in your monthly mortgage payment during a period of hardship. Your servicer outlines the terms of your agreement, but forbearance typically provides short-term payment relief, often for 3 months. Any past-due payments and any payments not made during the forbearance period are due when the forbearance ends. You'll work with your servicer to determine how to bring your loan current at the end of the forbearance period.

Not everyone qualifies for forbearance, and your servicer needs to approve it. You’ll want to be sure you have enough funds to repay your missed or reduced mortgage payments. Many servicers want you to repay all overdue payments as soon as forbearance ends. Alternatively, they may outline a loan modification plan that spreads the amount across future mortgage payments.

Forbearance isn’t right for everyone, especially if you’re struggling with payments. Fortunately, there are other options to help, such as repayment plans, loan modifications, partial claims, or payment deferrals. Keep in mind that different investors allow different options.

Are forbearances reported to credit bureaus?

Forbearances are typically reported to the major credit bureaus: Equifax^®, Experian™, and TransUnion^®. However, not all forbearances impact your credit score. For example, forbearances under the Servicemembers Civil Relief Act and those affected by a natural disaster don’t have an impact at Rocket Mortgage.

Does forbearance impact your credit score?

Forbearance itself may not negatively impact your credit score, especially if you don’t miss any payments. However, it often stays on your credit for the life of the loan, so it could have a marginal impact. It’s important to remember that having forbearance on your credit report is often better than late payments or a foreclosure.

Your mortgage servicer is required to report information to credit bureaus accurately. In most cases, they’ll report any missed payments before or during forbearance, which could result in a lower credit score.

Missed payments can stay on your credit report for up to 7 years. The type of late payment can also change the impact on your credit score. Payments that are 60 – 90 days late often have a bigger impact than 30-day late payments. The good news is that as time goes on, these late payments have less of an influence on your credit.

Forbearance vs. deferment

Forbearance and deferment have similar meanings but aren’t the same when it comes to paying your mortgage. Let’s break down the difference:

• Forbearance: Forbearance is a temporary pause or lowering of your monthly payment. When forbearance ends, the missed payments must be repaid.
• Deferment: Deferral, or deferment, is sometimes an option for paying back past-due payments. In a deferral, a limited number of missed payments can be pushed back to the end of your loan.
• Partial claim: A partial claim is similar to a deferral, but they only apply to FHA loans. Past-due payments are usually repaid when you sell or payoff your loan.

Can you refinance if you are in forbearance?

Forbearance often impacts your ability to refinance. As mentioned above, any missed payments are reported to the credit bureaus, which could negatively impact your score. If you are in a forbearance, it is typically because you cannot afford payments due to a job loss or other expenses. If you can't afford to make your mortgage payment due to these factors you probably won't qualify for a refinance. Your loan should be in a current status to refinance, and it is considered delinquent while in forbearance if full payments are not made on time.

If your forbearance was due to a natural disaster, it might be easier to refinance. Natural disaster forbearance is considered non-credit-impacting, so your credit score may still be in good standing. To qualify for this type of assistance, officials in your area or state may be required to declare a state of emergency.

It’s worth knowing you could be able to refinance if your credit score is in good shape. Your lender will likely consider other factors, such as the age of your loan, how much home equity you have, and how many payments you’ve missed before approving the refinance.

If you qualify for refinance, your options may include 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

There are a few important steps to keep in mind as you’re gearing up to refinance your mortgage. Let’s take a look at some helpful tips.

Get current or keep up with post-forbearance payments

Keep in mind that forbearance doesn’t eliminate your outstanding debts. So, a good starting point is to get up to date with any repayments and stay on top of future mortgage payments. Missing additional payments could continue to hurt your credit, which might already be lower if you had late payments.

Additionally, you often have to make a minimum number of mortgage payments before you’re eligible for refinance. For conventional, FHA rate/term, and certain Jumbo Smart loans, you’ll need to make six payments before you can refinance. For FHA cash-out transactions, a year’s worth of payments is required.

Work on your credit score

For most homeowners in forbearance, you’ll likely need to spend some time improving your credit score. As previously mentioned, some forbearances don't impact your credit score. About 21% of all forbearance cases are due to natural disasters, the most common non-credit-impacting forbearance.

Outside of these exemptions, your lender will typically report your forbearance as a delinquency because you’re not repaying your loan according to the terms. Depending on how your lender reports the forbearance, it might hurt your credit score.

The good news is that there are a couple of strategies you can take to improve your credit score.

• Make your full, regular mortgage payment during the forbearance period.
• Avoid taking on new credit, debts, or loans that could indicate to your lender you’re stretching your monthly budget.
• Pay down any ongoing debts, such as student loans and credit cards.

Keep debt in check

One factor lenders use to determine whether you qualify for a mortgage is debt-to-income ratio (DTI). This ratio compares your monthly debts to your gross monthly income 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. Most lenders want to see a DTI of around 28%.
• Back-end DTI takes monthly payments on recurring debts and adds them to the minimum payments on credit cards and other lines of credit, compared to your gross monthly income. Most lenders want to see this DTI below 43%.

If you’re already having trouble paying your mortgage, it can also be easy to fall behind on other payments. Before refinancing, make sure you’re spending wisely and making on-time payments.

The bottom line: You can still refinance if you're on forbearance

Whether you missed payments before forbearance or only have forbearance listed on your credit report, it’s possible to refinance your mortgage. By taking steps to improve your credit score, getting up to date on your payments, and keeping up with your other debts, it’s possible to refinance your mortgage after forbearance.

If you’re ready to refinance your mortgage, you can begin the application process with Rocket Mortgage.

¹ Refinancing may increase finance charges over the life of the loan.

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