Refinancing a Mortgage in Forbearance

by Timothy Chase

Summary: In this post, we’ll explore the evolving landscape of mortgage forbearance rules—especially the changes following the 2008 financial crisis and the adjustments made during and after the 2020 COVID-19 pandemic. We’ll explain what it means to refinance while in or after forbearance, highlight the influence of lender overlays, and discuss how local factors in Colorado Springs may shape your experience. By the end, you’ll understand key considerations and discover how 719 Lending can help guide you toward the best refinancing strategy.

The Evolving Landscape of Forbearance

Forbearance agreements allow struggling homeowners to pause or reduce mortgage payments temporarily. In the aftermath of the 2008 financial crisis, forbearance options were often limited, and many homeowners in Colorado and across the country found it difficult to recover. Over time, government agencies and regulators recognized the need for more accessible relief measures.

Then came 2020: As COVID-19 impacted jobs, wages, and industries, mortgage forbearance rules underwent another significant transformation. Under the CARES Act, borrowers with federally backed mortgages gained expanded rights to enter forbearance without immediate penalties. This move provided a critical lifeline, allowing Americans, including those in Colorado Springs, to stabilize their financial situations during uncertain times.

Here’s what you need to know next: Although initial COVID-era forbearance accommodations were widespread, many have since changed. Today, lenders often require homeowners to exit forbearance and demonstrate financial stability before refinancing. Additionally, each lender can add more stringent requirements, known as lender overlays, on top of the existing federal guidelines. Understanding how these rules have evolved—and how they differ from one lender to another—is key to navigating the refinancing landscape after forbearance.

Can You Refinance While in Forbearance?

Refinancing while actively in forbearance is typically challenging. Most lenders want proof that you can manage regular payments before granting a new loan. According to guidance referenced in sources like Rocket Mortgage, you generally must exit forbearance first. After that, it often takes at least three consecutive on-time payments to demonstrate payment stability. Some lenders may require even more, such as six months, depending on their overlays.

While these guidelines provide a baseline, no universal rule applies to all lenders. Each mortgage lender, mortgage broker, or loan officer can set conditions beyond what the Federal Housing Administration (FHA), Fannie Mae, Freddie Mac, and other agencies stipulate. For example, you might find that one Colorado-based lender demands six months of on-time payments after exiting forbearance, while another only requires three. These differences illustrate the importance of working with a knowledgeable mortgage professional—someone who can help you identify a lender whose criteria you can meet.

Understanding Lender Overlays

Lender overlays are additional restrictions placed on top of standard guidelines set by federal agencies. While the FHA or other agencies might say three on-time payments post-forbearance are enough, a lender could insist on more. Similarly, a lender might demand a higher credit score or a more favorable debt-to-income ratio than the minimum required by agencies.

These overlays emerged from lessons learned during past financial crises. In 2008, many loans were approved under looser criteria. The result was widespread defaults and market instability. Post-2020, lenders remain cautious, and overlays help them mitigate risk. This caution means you must be prepared to meet stricter standards than you might expect from general federal guidelines.

Key Factors That Influence Your Ability to Refinance After Forbearance

1. Post-Forbearance Payment History:
One of the most critical elements is demonstrating that you can handle your mortgage again. Many lenders look for at least three consecutive months of timely payments once you exit forbearance. Others might require more, so it’s best to assume that a longer track record can only help. Regular, on-time payments reassure lenders that you’ve regained financial stability—something especially important if you’re aiming to refinance in Colorado’s competitive housing market.

2. Loan Type and Agency Guidelines:
Different loan types come with their own baseline rules. FHA, Fannie Mae, and Freddie Mac have distinct post-forbearance refinancing guidelines. For instance, some agencies allow refinancing shortly after resuming payments, while others maintain stricter standards. Staying informed about the program you’re dealing with—such as an FHA-backed loan—helps you anticipate what lenders will expect.

3. Credit Profile and Debt-to-Income Ratio:
Even after you’ve resumed payments, your overall financial picture matters. Lenders will review your credit score, debt-to-income ratio, and employment stability. Improving these factors can offset some of the perceived risk associated with a recent forbearance. A stronger financial profile also positions you for better interest rates and loan terms.

4. Market Conditions in Colorado Springs:
The Colorado Springs real estate market is dynamic. Local home values, demand, and economic conditions may influence how easily you can refinance. If property values have increased significantly, you’ll have more home equity, which can improve your refinance terms. On the other hand, if your home’s value remains flat or has declined, you may face more stringent requirements. Local expertise from 719 Lending can guide you through these Colorado-specific nuances.

5. Documentation and Transparency:
As highlighted by Rocket Mortgage’s guidance and other reputable sources, documentation is crucial. Be prepared to show proof that you’ve exited forbearance, outline any repayment plan or loan modification you agreed to, and provide evidence of on-time payments. Full transparency helps streamline the refinancing process and reduces uncertainty for both you and your lender.

Steps to Refinance Successfully Post-Forbearance

1. Exit Forbearance and Resume Payments:
Your first move should be to formally end your forbearance agreement. Contact your loan servicer, confirm the end date, and arrange a plan to bring your mortgage current if necessary. Some options may include a repayment plan, loan modification, or a partial claim. Once you’ve reestablished normal payments, focus on punctuality—on-time payments are your strongest leverage in convincing a lender to refinance.

2. Maintain a Track Record of Timely Payments:
Aim for at least three months (or more) of timely payments before seeking a refinance. While three months is a common guideline, some lenders may require six. The more you can show stable payments, the stronger your refinance application becomes.

3. Improve Your Financial Profile:
If possible, lower your debt-to-income ratio by paying down credit cards or other debts. Check your credit report for errors and work on boosting your credit score. A healthier financial profile positions you for better refinance terms and may help you meet stricter lender overlays.

4. Stay Informed About Agency and Lender Changes:
Guidelines from agencies like Fannie Mae, Freddie Mac, and FHA can change. Regularly review their official resources:

Also check the Consumer Financial Protection Bureau (CFPB) for up-to-date consumer resources. Knowledge of these rules ensures you don’t miss any new, borrower-friendly policies.

5. Get Expert Help from 719 Lending:
Local expertise matters. 719 Lending, a trusted mortgage professional serving Colorado Springs and beyond, can interpret lender overlays, evaluate your financial situation, and guide you toward the most suitable refinancing strategy. Their local knowledge helps you navigate the Colorado real estate landscape and ensure you’re meeting the criteria that matter most to lenders.

Check out our Home Loan Options to learn more about what 719 Lending can do for you. With a dedicated loan officer at your side, you’ll receive personalized advice tailored to your situation, ensuring you choose the right time and terms for your refinance.

Frequently Asked Questions (FAQ)

Q: Can I refinance immediately after exiting forbearance?
A: Typically, you need to show a pattern of on-time payments first. Many lenders require at least three months of consecutive, timely mortgage payments post-forbearance. Some may ask for more, depending on their overlays. Consult with a mortgage broker or loan officer at 719 Lending to clarify what’s needed in your case.

Q: Will refinancing after forbearance affect my interest rate?
A: It depends on your financial profile, the current market, and the lender’s risk assessment. If you’ve improved your credit and built equity in your Colorado Springs home, you may still qualify for competitive rates. However, if overlays are strict or your credit score is lower, you might encounter higher rates.

Q: Do I need an appraisal to refinance post-forbearance?
A: Most refinances require an appraisal, although certain streamline refinance programs may offer reduced requirements. A strong Colorado Springs market can work in your favor if it boosts your home’s appraised value, potentially improving your terms.

Q: Are there differences between COVID-19 forbearance and past programs?
A: Yes. COVID-19 forbearance was generally more flexible and widely accessible compared to previous crisis measures. However, some of these leniencies have rolled back. Lenders are now more cautious and often rely on overlays to ensure borrowers can handle refinanced loans.

These reputable sources provide authoritative information and can help you understand evolving guidelines and best practices for refinancing after forbearance.

Taking the Next Step with 719 Lending

Refinancing in forbearance or after forbearance is certainly possible, but it requires careful planning, patience, and awareness of changing rules. The differences between lender overlays, baseline agency criteria, and local market conditions in Colorado can significantly impact your refinancing journey.

In short, while the landscape may feel more complex than ever, you aren’t on this journey alone. By partnering with 719 Lending, you gain expert insight, tailored guidance, and a strategic approach to meeting your post-forbearance refinancing goals in Colorado Springs. With the right preparation and support, you can secure a mortgage that suits your needs and financial future.