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Think you can’t refinance your mortgage because you are on a forbearance plan, don’t have perfect credit, or can’t afford closing costs? Think again. There are a variety of refinances available and there may be one that’s right for you. Mortgage rates have been at, or near, historic lows in recent months, so it’s an ideal time to reconsider refinancing. With an eye on the possibilities, here’s a look at 5 lending challenges matched with potential solutions that may have you rethinking refinancing.
1. My mortgage is in forbearance
You may have heard that you can’t refinance if your mortgage is in forbearance, but there’s hope. Certain guidelines allow homeowners who are able to remain “current” on their loans during forbearance the ability to refinance. To be considered current, you’ll either have to make your mortgage payments as usual while in forbearance or pay any you’ve skipped before your forbearance period ends.
You may also qualify to refinance if your forbearance has ended and you are now enrolled in a repayment plan, partial claim, payment deferral, or loan modification. According to guidance published by Fannie Mae, Freddie Mac, FHA, and VA, homeowners using these solutions are eligible to refinance after making a number of consecutive payments following the end of the forbearance. In most cases, you will need to document your income, although if you have an FHA or VA loan, you may also qualify for a streamline refinance (more on that in question 4).
2. If I refinance, it will take longer to pay off my loan
Many homeowners fear a refinance will reset their mortgage’s clock—meaning that if they’ve been paying on a 30-year mortgage for 10 years, they’ll have to start all over again with a new 30-year term. If that’s a concern for you, consider refinancing to a shorter loan term. In the example above, you’d have 20 years left on your current mortgage and could potentially refinance to a 20-year term or less. You may also reduce your interest rate in the process. Shorter terms often have lower rates.
3. I can’t afford the closing costs
Closing costs for refinances can add up to thousands of dollars, which can understandably be a daunting expense. If that’s a hurdle for you, a lender may be able to roll these fees into your mortgage creating a “no closing cost loan.”
4. I have bad credit
If you currently have an FHA or VA loan, you may be eligible for a streamline refinance. These refinances are known for reduced paperwork, and faster—or streamlined—loan processes. Many don’t require a minimum credit score or the minimum score they allow may be lower than other refinances permit. You will still need to meet certain eligibility requirements, however, like being current on your mortgage. Benefits also vary among these loans but can include:
- No income documentation requirement
- No appraisal requirement
- No increase to your current payment
- A guaranteed 0.5% interest rate reduction
- Limited or no fees out of pocket
Note: In some cases, an FHA streamline refinance or VA Interest Rate Reduction Refinance Loan (IRRRL) may require an appraisal and/or full income and asset documentation and full credit qualification. This requirement will increase fees and required paperwork. A licensed Mortgage Professional can inform you of all options available as well as the program requirements.
5. I can’t afford to remove my PMI
If you want to remove private mortgage insurance (PMI) when you refinance but don’t qualify to do so yet, you may be able to reduce your PMI costs as an alternative. One way to do this is to leverage your credit score. If it has improved since you applied for your last mortgage, you may be eligible for a lower PMI payment. A loan advisor can explain this and other strategies, including how you may be able to eliminate PMI altogether if your home’s value has risen enough.
Thinking differently about refinancing now? Talk to one of our loan advisors to uncover solutions that may be available to you and check out our step-by-step refinancing guide to help get started.