Why You Should Refinance After Mortgage Forbearance
Our country is currently in an ongoing state of recovery from the global COVID-19 crisis – both health-wise and economically. One facet of that recovery was the CARES Act mortgage forbearance program, which enabled some homeowners to pause or suspend their house payments if they were facing financial challenges as a result of the pandemic. Many are wondering when it’s possible to refinance after mortgage forbearance.
Millions took advantage of this assistance and were able to save their homes. Due to record low-interest rates, there were also millions of homeowners refinancing this past year as well. If you’re part of the former group, you may be wondering if you should refinance after forbearance in order to potentially save money while getting back on solid ground.
Prior to the pandemic, borrowers generally had to wait at least a year after missed payments were current in their forbearance before applying to refinance, however, COVID-19 and the CARES program allow possible refinancing, and sooner. It just depends on the type of loan you have and where you’re at with repayment.
Forbearance proved to be a forgiving short-term solution this past year, but it’s not a forgiven loan. If you have a conventional mortgage – one which is backed by Fannie Mae or Freddie Mac – you’ll need to exit forbearance and make three consecutive payments before being eligible to refinance.
Even if you’re more behind than that, once those three consecutive payments are made the outstanding balance can be added to the back end of the loan and you’re able to refinance.
The Federal Housing Administration tends to follow the lead of Fannie Mae and Freddie Mac, but if you have an FHA loan, the requirements for refinancing after forbearance aren’t as straightforward and may vary depending on your program or lender. While borrowers typically aren’t required to pay everything back in one lump sum, lenders may have secured second liens that need to be repaid before refinancing.
If you have a mortgage through the Veterans Administration, you’ll want to call your provider to discuss your options after forbearance. You may qualify for a loan modification program that will help you get back on track.
Are You Ready to Refinance After Forbearance?
If you asked your lender for forbearance but were able to keep making your mortgage payments as usual, then you’re able to refinance without any of the requirements previously discussed. Either way, once you’re ready to refinance you’ll need to qualify as with any new mortgage.
The lender will want to make sure you’re financially stable enough to continue making payments so they will look at the usual factors indicating that ability:
- Credit score: Check your FICO to make sure there are no errors or issues that you can’t explain. A below-average score doesn’t preclude approval, however the higher the score, the better chance at a lower interest rate.
- Income: While the pandemic hit many industries hard, if your income reflects that you’ve maintained or recovered in the preceding months, you should be fine.
- Debt-to-income ratio: Also known as the DTI, this will show lenders that you aren’t relying heavily on credit cards or loans versus your income.
- Loan-to-value ratio: The LTV indicates what the home is valued at – and how much equity it’s gained – and how much loan you’re refinancing for. The ideal ratio is 80% value. This is also key when seeking a cash-out refinance.
The Right Timing for Refinancing?
The pandemic irrevocably changed us as a nation, and it certainly shifted certain priorities for many homeowners. If you’re looking to reinforce your personal financial footing after this period of uncertainty, refinancing after forbearance may be an optimal solution. The data firm Black Knight estimates that millions of homeowners could save more than $300 per month by refinancing.
The Federal Reserve has assured that rates will stay comparably low, but mortgage rates are already on the rise, meaning the savings window could be narrowing. If you’re still in COVID forbearance and hoping to take advantage of potential savings on the life of your loan, then give Titan Mutual Lending (Titan) a call today to discuss your options.