When Can I Refinance After Forbearance Using a Conventional Loan?
Refinance or Purchase After Forbearance
May 19th, 2020 – Fannie Mae released an important update to its guidance on the Impact of COVID-19 on Originations: Temporary eligibility requirements for purchase and refinance transactions.
This was much-anticipated guidance as the prospect of being locked out of traditional financing options for 12 months following a forbearance due to COVID-19 is creating a lot of pressure for lenders as homeowners start to plan ahead and taking advantage of historic low interest rates.
The internet has been abuzz with vague, high-level reporting since Fannie Mae and Freddie Mac jointly released guidelines for buying a new home or refinancing your current home after forbearance.
In this article, we’re going to dig into the underwriting guidelines and give you as much information as is currently available. So much so, that you may know more about your options than your loan officer.
By the way, if that’s the case, get a new loan officer, quick! Your home is too important to trust to an inexperienced loan officer.
Temporary Eligibility Requirements
Effective Immediately: Lenders may immediately follow these guidelines with loans that are already in process and must apply them to loans with an application date on or after June 2, 2020.
While they make it a point to use the word temporary, in reference to how long “temporary” is, it only says that “These policies will be effective until further notice”.
Can I Purchase or Refinance While in Forbearance?
Yes, you can. If you are in forbearance and never missed a mortgage payment, you are eligible for a purchase or refinance loan under these temporary guidelines. Your lender must simply order verification of your mortgage payment history from the servicer if it is not reporting on your credit report.
While I still believe it makes the most sense to allow homeowners in forbearance to refinance to catch up on missed payments by refinancing, this guidance only applies to purchase or a refinance to lower your rate or change the term of your loan.
The guidance specifically states: “Proceeds from a refinance may not be used to reinstate any mortgage loan.” While this is not ideal, it’s a very good start. There are a lot of things being figured out at breakneck speed. I will not be surprised if we have further clarification on this program in the next couple of weeks.
NOTE: A mortgage payment is not considered late as long as it is received on or before the last day of the month in which the payment was due. Example: If you make your May mortgage payment on May 31st, it’s not “late” in terms of credit reporting or qualifying for a new loan.
Am I Still Eligible If I Skipped Payments While in Forbearance?
Yes, you can be eligible if you skipped payments. If your loan is fully reinstated with a lump sum payment, you would be eligible for a Fannie Mae or Freddie Mac Conventional purchase or refinance loan.
If your loan is reinstated AFTER you apply for the purchase or refinance loan, your lender is going to have to review the source of those funds in accordance with the sources of funds section of the underwriting guidelines.
A loan is not an acceptable source of funds, and proceeds from a refinance cannot be used to pay skipped payments. In this case, you may be required to follow the loss mitigation solution below.
If You Have a Loss Mitigation Solution
If your skipped payments were resolved through a loss mitigation solution like a COVID-19 Payment Deferral, a loan modification, a repayment plan or any other loss mitigations solution, you will be eligible once you’ve made 3 consecutive payments under the repayment plan.
Examples of common loss mitigation solutions
- If you enter into a payment plan, you must make at least three payments or complete the repayment plan, whichever comes first.
- If you are given Payment Deferral or a COVID-19 Payment Deferral solution, you must make 3 consecutive, on-time payments before you are eligible under these temporary guidelines.
- If you are in a trial period for a loan modification, you must have made 3 consecutive, on-time trial payments.
- For any other loss mitigation solutions, you have to document 3 consecutive, on-time payments.
NOTE: There is NO requirement that all skipped payments be paid back to be eligible.
Income and Employment Documentation
Because these are unique times, there are certain situations that many of us have found ourselves in by no fault of our own. Here are a couple of potential issues that can come up that you want to get in front of.
- Unemployment benefits are not considered income when you are applying for a mortgage loan.
- Furloughed employees must be back to work
- Your lender is going to do a “Verbal Verification of Employment” before funding your loan. Make sure you have accurate contact information and ask HR to expect a call once you know the exact timeline.
Are Lower Rates Coming?
I am certainly no fortune teller or visionary here, but I do have people that I know and trust for advice about the how and the why behind this question.
I’m just going to default to always handy and accurate default of “experts are encouraged” that interest rates will continue to come down, and stay historically low for quite some time during the full recovery process after abruptly shutting down the economy.
The advice we are giving now is, if you can wait, you should. There are still some kinks in the mortgage markets that in many cases are resulting in higher than required interest rates in an effort to factor in the risk of forbearance and liquidity.
There are good things to come for those that can wait!
This website is a private website and network of mortgage experts that I personally know and trust. If you have questions about forbearance, please see our special project – ForbearanceReport.org
If you would like to be introduced to someone that I know and trust to talk about a new purchase or refinance loan, click on any of the graphics in the sidebar or any “Find the Right Lender. Find the Right Loan” link in the article.
If you want the truth about interest rates, home values, and what’s going on in the market, Josh Lewis, Broker/Owner of BuyWise Mortgage, a California Mortgage Broker.
Josh does a weekly mortgage market update that many are finding essential to making informed decisions about one of the biggest and most important investments you and your family will make.