Point of Interest
Homeowners with federally-backed loans that are in forbearance will be eligible for loan refinancing under new Federal Housing Finance Authority (FHFA) rules. However, you’ll have to meet certain conditions to qualify.
The COVID-19 pandemic has done some serious damage to the nation’s economy, which has caused many homeowners to struggle with mortgage payments. In order to offer some relief, the CARES Act made it possible for homeowners with federally-backed mortgage loans to opt into forbearance plans.
Forbearance provides immediate relief to homeowners who are struggling with their monthly mortgage payments by allowing them to hold off on these payments for a set period of time. And, to ensure these homeowners will still have the opportunity to take advantage of the current record low interest rates, the FHFA is now allowing homeowners whose loans were in forbearance to refinance to a lower rate.
There are some nuances to these new rules, though — and if you’re looking to refinance your home loan after a period of forbearance, you’ll want to know what they are.
How does a mortgage forbearance work?
Homeowners with a federally-backed mortgage were offered the option to apply for forbearance under the Coronavirus Aid, Relief and Economic Security (CARES) Act. Mortgage forbearance provides homeowners with temporary relief through a temporary pause in their monthly mortgage payments for a set period of time.
While in forbearance, homeowners are not required to make mortgage payments. Once the forbearance period is up, homeowners are required to pay back the total amount of missed payments — not in one lump sum, but over time — and won’t incur any additional fees, penalties or interest.
As long as borrowers were current on their mortgage payments prior to entering the forbearance program, there is no negative impact to their credit, either.
The framework is intended to give homeowners a lifeline to get back on their feet after job or income losses, and is also intended to help avoid mass foreclosures occurring in the national housing market.
Can I refinance my mortgage if I am in forbearance?
Mortgage refinancing rates recently hit a record low due to the pandemic, and these low rates make the idea of refinancing attractive to some homeowners — including the ones who have been taking advantage of mortgage forbearance.
Under normal circumstances, lenders would immediately disqualify refinance applicants who had recently been in forbearance. Under the new FHFA rules, however, borrowers who’ve requested forbearance will remain eligible for refinancing options — as long as they remain current on their loan payments after the forbearance time frame has ended.
In order to be eligible for a refinance after your loan has been in forbearance, you’ll have to make three on-time, scheduled mortgage payments to your lender. That means you’ll have to end the forbearance, make three consecutive payments, and then apply for a refinance. Otherwise you’ll be denied.
Still, while you can technically apply for a refinancing loan after being in forbearance, it’s important to remember that refinancing is still applying for a new loan. You’ll still have to qualify, which often requires showing a strong financial picture and solid credit, among other requirements.
Before applying for a mortgage refinance, it’s a good idea to take a look at your credit report and identify any credit blemishes. For example, if you’re behind on payments to a creditor, get current on payments as quickly as possible to help mitigate the damage to your score.
You’ll also want to make sure it makes fiscal sense to refinance — even if you qualify. After all, refinancing often comes with a ton of extra costs, like lender fees and closing costs, so you should fully weigh whether it makes sense to explore this option — even if rates are low.
The final word
The new guidelines regarding forbearance and refinancing mean that homeowners don’t need to choose between short-term and long-term mortgage relief. Homeowners who’ve been in forbearance due to COVID can still take advantage of the low rates we’re seeing as a result of the pandemic. This gives homeowners a viable option for long term savings and also gives them more control over their financial future.