Did you just exhaust your forbearance period allocation and are looking to refinance?
That’s everything we discuss in this article. Refinancing your FHA loan after a forbearance can help you save money and reduce your monthly payments.
But it’s important to understand the rules and regulations that govern this process.
This article will explore the ins and outs of refinancing your FHA loan after forbearance, including the eligibility criteria, and other important considerations to know before you start.
So whether you’re looking to take advantage of today’s low-interest rates or need to lower your monthly expenses, grab your notepad and let’s dive into the latest information.
Understanding Forbearance and Its Impact on FHA Loans
Forbearance is an agreement between you and your lender to suspend mortgage payments for some time temporarily. It’s available to you if you’re a homeowner experiencing financial hardship, and it can come in handy if you have an FHA loan.
For FHA loans, forbearance is available for up to 12 months. You will not be required to make mortgage payments during this time, but interest will continue to accrue on the loan.
It’s worth noting that forbearance doesn’t erase missed payments, and you must make up the missed payments after your forbearance period ends.
Here’s how forbearance can affect your FHA loan.
- If you’re in forbearance on an FHA loan, you may only be able to refinance or take out a new FHA loan once your forbearance period has ended and you have made several months of on-time payments. Why? Because being in forbearance may be viewed as a sign of financial distress, making lenders hesitant to lend to you.
- If you’re in forbearance and miss payments, it can negatively impact your credit rating, making it more difficult to obtain future credit, including FHA loans.
- If you’re in forbearance and decide to sell your home, the amount of forbearance you have received will need to be settled at the time of sale.
Tips for Refinancing an FHA Loan After Forbearance
FHA loan refinancing means replacing an existing FHA loan with a new FHA loan that has different terms, such as a lower interest rate, shorter loan term, or changed repayment terms.
The process allows you to save money on your monthly mortgage payments, reduce your loan term, or access equity in your home. FHA loan refinancing is usually favorable after a forbearance period.
Here are some tips to make it for refinancing an FHA loan after forbearance:
- Prepare for delays: Refinancing after forbearance can take longer than a traditional refinance. Be patient and be prepared for delays, especially if there is a high volume of refinancing applications.
- Understand your options: Before refinancing, ensure you understand the available options. These can include conventional refinancing, FHA streamlined refinancing, and other programs for people with financial constraints.
- Work with a reputable lender: it’s important to work with a lender with experience working with borrowers who’ve been in forbearance. For homes in any of these locations, we can help you with your refinancing after forbearance.
Note that this also applies to FHA 203k loans that have gone through a period of forbearance.
What to Do If You Can’t Refinance After Forbearance
There are a few situations where refinancing after a forbearance may not be available to you. If you find yourself in a situation like this, here is what you should do:
- Boost your credit rating: A higher credit rating can make it easier to refinance your FHA loan and qualify for a new loan and lower down payment requirements. Ensure you make on-time payments, settle debts, and report any errors on your credit report.
- Contact your lender: If you’re struggling to make your mortgage payments, contact your lender immediately. They can offer you a loan modification, which can lower your interest rate, extend your loan term, or change the type of loan you have.
- Consider a repayment plan: A repayment plan allows you to make up missed payments over time rather than all at once. This can be a good option if you’re only a few months behind on your mortgage payments.
The Pros and Cons of Refinancing an FHA Loan After Forbearance
Should you attempt to refinance your FHA loan after a forbearance? The advantages and potential drawbacks below should help you decide which suits your current financial situation.
We also include a summary table below to help you evaluate.
Pros
- Better loan terms: Refinancing can also allow you to change the terms of your loan, such as the length of the loan or the type of interest rate. This can make your monthly payments more convenient or help you repay your loan faster.
- Equity rebuilding: Forbearance can affect your home’s equity. Why? Because missed payments reduce equity. Refinancing can help you rebuild that equity over time.
- Lower interest rates: One of the biggest benefits of refinancing is the potential to secure a lower interest rate. This can save you cash over the life of your loan and reduce your monthly mortgage payments.
Cons
- Credit requirements: Refinancing requires good credit, and if your credit has been affected by forbearance, you may not qualify for a lower interest rate. Bad credit can also affect how much you qualify for in an FHA loan application.
- Fees: Refinancing attracts fees such as closing costs, which can add up quickly. Make sure to carefully consider the costs involved and ensure that you’ll save enough money over time to make it worthwhile.
- Loss of FHA protections: If you refinance an FHA loan, you may lose some protections that usually come with an FHA loan, such as mortgage insurance and more lenient credit requirements.
Summary table:
| Pros | Cons |
|---|---|
| Lower monthly payments | Additional costs and fees |
| Lower interest rates | Extended loan term |
| Opportunity to change loan terms | Potential impact on credit score |
| Ability to convert an ARM to a fixed-rate loan | Lengthy refinancing process |
| Access to cash-out refinancing | Risk of losing equity |
| Improved financial situation | Limited availability for non-FHA refinancing options |
| Stability and predictability of mortgage payments | Possible reduction in mortgage interest deduction |
Other Financing Options to Consider After Forbearance
If the prospects of refinancing your FHA loan after a forbearance do not appeal to you, here are some other financing options to consider after forbearance:
- Conventional loans: A conventional loan is a home loan not guaranteed by the federal government. These loans may have stricter credit and income requirements, but they offer lower fees and interest rates than FHA loans.
- HELs (Home equity loans): If you’ve built up equity in your home, you can get a home equity loan and access cash for home repairs or other expenses.
- USDA loans: These loans are available to low- and moderate-income homebuyers in eligible rural and suburban areas. USDA loans may offer lower interest rates and flexible credit and income requirements than FHA loans.
Frequently Asked Questions
Can I refinance my FHA loan if I missed payments during forbearance?
If you missed payments during forbearance, it might impact your ability to refinance. Lenders may see this as a red flag and hesitate to approve your refinancing application. However, it is still possible to refinance your FHA loan if you missed payments during forbearance.
How will my forbearance status impact my ability to qualify for refinancing?
Here are some of the ways your forbearance status may impact your ability to qualify for refinancing:
- DTI (debt-to-income) ratio: If you have been in forbearance, you may have accrued additional debt that will affect your debt-to-income ratio. This ratio is one of the core FHA loan eligibility criteria and a key factor in determining whether you qualify for refinancing.
- Higher interest rates: Depending on the lender and the terms of your forbearance agreement, you may be subject to higher interest rates when refinancing. Why? Because forbearance indicates that you are a higher-risk borrower.
- Limited options for refinancing: Some lenders may not offer you refinancing if you’ve been in forbearance since it’s proof of financial instability and a higher risk for lenders to offer you refinancing.
What if I’m still in forbearance when I want to refinance my FHA loan?
If you have an FHA loan and you’re still in forbearance when you want to refinance, here are some of the things you should consider doing:
- Be prepared to provide documentation: When refinancing an FHA loan, you must provide documentation of your income, employment, and other financial info. Be prepared to provide this information, even if you are still in forbearance.
- Consider waiting: If you’re still in forbearance and are having difficulty making payments, wait until your forbearance period is over before refinancing. This will give you time to get back on your feet and improve your credit score.
- Explore other options: If you can’t refinance your FHA loan while still in forbearance, other options are available to you. For instance, you can apply for a loan modification or explore other financing options.
Final Thoughts
If you’re considering refinancing your FHA loan after forbearance, it’s important to know that the time you need to wait is dependent on various factors.
These include the type of FHA loan, the duration of the forbearance, and the lender’s policies, among others.
To get the process wrapped smoothly, we recommend you keep in regular contact with your lender to provide any relevant documentation that may be needed.
You should also feel free to contact us anytime. We can walk you through the qualifications or requirements of refinancing your FHA loan after forbearance.
