Does Mortgage Forbearance Affect Refinancing? What Homeowners Need To Know

In response to COVID-19, many actions were taken to support struggling Americans. One of the things implemented was the ability to request forbearance, or a pause in mortgage payments, for anyone who was impacted by the virus or its negative effects on the economy.

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?

It’s important to note that forbearance has in the past had more of an effect on ability to refinance. To begin with, there’s usually a major impact on your credit score as a result of entering forbearance. Congress specified that these COVID-19 forbearances were to be treated as non-credit impacting, looping them in with protocols for those granted after a natural disaster.

There are also aspects of this that may be unique to the Coronavirus Aid, Relief and Economic Security (CARES) Act: Clients just had to specify that they were impacted by COVID-19. Some people chose to go on forbearance just in case they ran into trouble later in the pandemic and were able to maintain their payments. Most of the time, clients don’t stay current during forbearance and can’t immediately refinance.

Due to the credit hit involved in forbearances that aren’t either authorized under the CARES Act or entered after a natural disaster, it’s not likely that many people will be able to refinance during a forbearance. You also have to maintain your payment throughout the forbearance, which isn’t easy. That said, you can refinance during forbearance under the right circumstances.

One of the first agencies to make a major announcement regarding the eligibility to refinance during forbearance was the federal regulator for conventional loans – those backed by the organizations Fannie Mae and Freddie Mac. Its requirements are as follows:

In response to the COVID-19 pandemic, the Federal Housing Finance Agency (FHFA) declared in 2020 that borrowers who are in forbearance but have continued to make payments on their mortgage loan will still be eligible for a refinance. Those who have been unable to continue payments during forbearance will become eligible for refinancing once their forbearance has been over for 3 months and three consecutive mortgage payments have been made.

It’s also possible to refinance while in forbearance if you’re doing a full documentation VA refinance and made six consecutive payments prior to entering forbearance. Additionally, 212 days must have passed since the first payment date on your current loan and the closing date on your new one.

Finally, if you need a bigger loan amount, you can get a Jumbo Smart loan from Rocket Mortgage® if you continue to make your regularly scheduled payments during the forbearance.

You may also be able to refinance United States Department of Agriculture (USDA) loans during forbearance if you meet requirements. Rocket Mortgage isn’t offering USDA loans at this time.

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.

First, as detailed above, loans from Fannie Mae and Freddie Mac can only be refinanced during a forbearance if you continue to make all your payments. Otherwise, you will need to fully reinstate your mortgage or make three consecutive payments under a workout plan, whether that’s a repayment plan, deferral, FHA partial claim or modification.

• 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 during or after exiting forbearance with a Department of Veterans Affairs (VA) loan if they qualify. The exception to this is that you can’t currently be in forbearance and do a VA Streamline, also referred to as an interest rate reduction refinance loan or VA IRRRL. They require full documentation and appraisal. VA seasoning requirements also apply.
• 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 because outside of this specific COVID-19 situation, most people who apply for forbearance are doing so because they’re not currently able to make their mortgage payment and need them to be paused.

Moreover, most traditional forbearances outside of those authorized in the CARES Act and certain 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 and those issued as a result of COVID-19 are non-credit impacting, so the forbearance shouldn't have an impact. As the National Emergency Declaration ended in April of 2023, any protections under the CARES Act are no longer federally required. Rocket Mortgage chose to continue to keep COVID-19 forbearances non-credit impacting. 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.