Mortgages in forbearance now eligible for refinancing — why you should act quickly

Mortgages in Forbearance Will be Eligible for Refinance

Mortgages in forbearance now eligible for refinancing — why you should act quickly

Homeowners have had a lot to process and a lot to deal with over the past months as a result of the COVID-19 pandemic. As the economy started to suffer, interest rates dropped, and the rush was on to refinance. Many people found themselves work, which caused them to struggle to keep up with their mortgage payments — making temporary reprieves fixes mortgage forbearance necessary.

If you’ve been struggling to make mortgage payments on time, you may be asking yourself: Is mortgage forbearance an option for me? Is there a way to refinance after forbearance? And what other options do I have?

COVID-19 Update:

We’re keeping track of how the coronavirus pandemic is affecting mortgages.

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What is mortgage forbearance?

Before those questions can be answered, you need to understand exactly what is mortgage forbearance and how it works. Mortgage forbearance is when your loan servicing company, which is the company that sends you your mortgage bill, gives you the opportunity to pause your mortgage payments for a short-term, agreed-upon period of time.

[ Related: Using the HARP Program to Refinance an Underwater Mortgage ]

Mortgage forbearance is meant to help keep homeowners from defaulting on their loans through temporary relief.

The details of how mortgage forbearance works depend heavily on the type of loan you have and what your lender is willing to offer, but in all cases, you’ll pay back what you owe once forbearance is over.

Most lenders won’t require the money in a lump sum, though. You can often spread the payments out over time.

Mortgage forbearance is not the same as refinancing or a loan modification. While these are options that can help and should be explored, it’s important to realize they’re different.

How does a mortgage forbearance work?

Mortgage forbearance is handled by the company that services your loan.

If you’re unsure which company that is, you should be able to find it on your original mortgage documents or on any of your regular correspondence.

It may be different than the lender you acquired your loan from in the first place. Some lenders sell loans and then turn over the maintenance of that loan to a separate company.

If your lender offers it and you decide you want to go into forbearance, you must opt into the process. This is a formal declaration with the company that you accept the agreed-upon terms. At that point, your payments will pause or be lowered (depending on the terms of the agreement).

Some lenders may allow you to just add the missed payments on as additional payments, extending the length of your loan. Other lenders may charge a higher monthly cost after the pause period, and some might even require full payment at the end of the forbearance period (though this is becoming less common).

Under the CARES Act, which was passed to help people get through the COVID-19 pandemic, all government-backed loans (VA, FHA, USDA, Fannie Mae and Freddie Mac) offer forbearance eligibility for anyone who is financially struggling as a result of the pandemic. You are not required to prove your financial need with documentation.  

[ More: How Much House Can I Afford? ]

Mortgage forbearance during the COVID pandemic

For conventional loans, forbearance is the same now as it was prior to COVID-19. However, many lenders have rolled out programs in response to the pandemic providing homeowners in distress with more options. Remember, your lender doesn’t want you to default and will work with you to try and find a solution.

For federally or Government Sponsored Enterprise (GSE) backed mortgages, the CARES Act brought a lot of changes to forbearance. Your lender or servicer can’t foreclose on you until December 31, 2020 (for most loans) — at the earliest.

You’re able to get 180 days of forbearance if you notify your servicer or lender that you’re experiencing financial hardship as a result of COVID-19. You’re also able to request another 180 day extension if needed, for a total of 360 days of mortgage forbearance. You’ll incur your normal interest costs, but there are no additional fees, penalties or added interest.

You’re not required to submit any documentation as proof to use this Coronavirus financial assistance.

How to refinance after forbearance

In the past, you were unable to refinance your home or purchase a new home while in forbearance. Fortunately, the path to refinancing after forbearance is much easier for federally-backed loans under the CARES Act.

In the past, you were required to make 12 months of on-time payments before you could refinance after forbearance.

For mortgages backed by Fannie Mae or Freddie Mac, you now only need to make three months of on-time payments after forbearance to qualify for refinancing.

Remember, though, that this is only for certain types of federally-backed mortgages. Homeowners with conventional mortgages need to contact their loan servicer to see what requirements are in place.

[ More: When to Refinance Your Mortgage ]

That said, this isn’t a guarantee that you’ll be approved for forbearance refinancing. Remember, refinancing is when a new lender pays off your old loan and gives you a brand new loan with different repayment terms.

The new lender isn’t going to extend an offer to you unless they’re confident you’ll be able to stay current on your payments. If you’re still work or your credit score has been damaged, you might be too risky in the lender’s eyes. Still, it’s worth exploring if you believe you can save money or lower your payments to a more manageable level. The worst a lender can say is no.

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Mortgage Forbearance: Guidelines for Homeowners

Mortgages in forbearance now eligible for refinancing — why you should act quickly

Concerned about making your next mortgage payment? Forbearance may be an option. Working with your lender to get forbearance helps you avoid late penalties and avert the risk of foreclosure.

If you’ve experienced a financial hardship, here's what you should know about loan forbearance for mortgages.

» MORE: Mortgage relief programs available during the coronavirus crisis

What is mortgage forbearance?

Mortgage forbearance provides temporary relief by allowing you to make lower monthly payments, or no payment at all, for a specific period of time. It is generally requested by homeowners dealing with an event that impacts their ability to pay their mortgage, a job loss, natural disaster or major illness.

Mortgage forbearance is not a waiver or a grant; you'll still owe the amount of those missed or reduced payments.

Will mortgage forbearance affect my credit?

Unless your lender has agreed not to report it, your forbearance will be reported to credit bureaus. But mortgage forbearance is less damaging to your credit score than a missed payment and helps you avoid foreclosure.

» MORE: What to do if you can't pay your mortgage

How does mortgage forbearance work?

To request forbearance, you'll have to contact your lender. Lender qualifications can vary, and the type of mortgage you have can also determine what options you're offered. If you qualify for forbearance, your lender will work with you to set up a forbearance agreement. Terms can include:

  • The length of the forbearance period

  • The amount of payment required during the forbearance period

  • Whether the lender will report the forbearance to credit bureaus

  • How you'll repay the lender after the forbearance period ends

Your loan — including the skipped or lowered payments — will still accrue interest during forbearance.

“Your loan — including the skipped or lowered payments — will still accrue interest during forbearance.”

You'll also continue to receive monthly statements during the forbearance period, even though you aren't making payments. The law requires lenders to provide statements every 30 days, so the paperwork isn't paused just because your payments are.

What happens when mortgage forbearance ends?

When the forbearance period ends, you'll have to pay your lender back according to previously arranged terms. There are several options for making up the missed amount.

With reinstatement, you repay all the payments you skipped with a lump sum. A repayment plan spreads the payments you missed over an allotted time period by adding a set amount to your regular monthly payment.

Another option is to add the repayment amount to the end of the mortgage, lengthening its term.

If your financial hardship lasts longer than you had anticipated, or you don't have the funds for a reinstatement or repayment plan, ask your lender about a mortgage loan modification. A loan modification changes the terms of your mortgage to help make your payments more manageable.

Get answers to questions about your mortgage, travel, finances — and maintaining your peace of mind.

How long does mortgage forbearance last?

Mortgage forbearance is intended to provide relief while you're dealing with a short-term financial problem, so it generally does not last more than one year.

Some lenders will ask you to provide them with updates during the forbearance period. If it looks you will need an extension or a different type of assistance, your lender can explain your options.

» MORE: Ways to reduce your mortgage payment

Will forbearance impact my financial future?

Unless your lender has agreed not to report it, your forbearance will be reported to credit bureaus. In order to be eligible for a new home loan after forbearance — whether a refinance or purchase — you'll need to re-establish yourself as a credible borrower.

“Most lenders would want to see you having made up the forbearance,” says Rocke Andrews, president of the National Association of Mortgage Brokers. In addition, Andrews notes, lenders will probably want to see 12 months' worth of on-time payments following the forbearance.

How do I qualify for mortgage forbearance?

Qualification requirements for mortgage forbearance vary by lender, but in most cases you'll start by submitting an application. Some lenders allow you to start with an online application; others ask that you call them first. You'll want to have a few items on hand:

  • Your most recent mortgage statement.

  • An estimate of your current monthly income.

  • An estimate of your current monthly expenses.

  • An explanation of your hardship (and, if possible, documents that substantiate your claim).

It's best to start the process early rather than waiting until you're about to miss a payment. “If you're going to ask, ask before you're late,” Andrews says. If you've missed a payment, that delinquency will show up on your credit report and stay until the loan has been made current again.

Some lenders may require you to request assistance within a certain amount of time following an event, a natural disaster, or a change in circumstances, filing for unemployment.

If your request for mortgage forbearance is denied, you have the option to formally appeal the decision with your lender. Your application will then be reviewed by a new loan officer (not someone involved in the initial decision), and you'll receive an updated decision.

How to get mortgage forbearance

Contact your lender or mortgage servicer in order to apply for mortgage forbearance. The phone number on your monthly mortgage statement is a good place to start. You can also check your lender's website for online resources.

If you want unbiased financial advice about your situation, consider talking to a housing counselor approved by the Department of Housing and Urban Development. You can find a counselor near you on the HUD website. They can weigh in on whether forbearance is the right choice for your situation and explain how different repayment plans would work.


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