What to Expect if You’re Doing a Mortgage Refinance After Forbearance

When the COVID-19 homeowner mortgage forbearance program was first announced last year, I insisted we enroll. As a food and travel writer, I knew I’d lose income. In a worst-case scenario, where we were relying solely on my wife’s income to pay the bills, we would need to cut expenses.

The mortgage forbearance program would slash our biggest bill ASAP. With mortgage forbearance plans, a lender puts a pause on payments for a specific amount of time and reason. In our case, it was six months and a global pandemic. The monthly payments aren’t forgiven, just delayed.

As it turned out, I kept around one-third of my income and attracted new clients throughout 2020, taking less of a financial hit than I originally anticipated. We actually saved money due to lower spending and CARES Act benefits.

By the time the six-month forbearance period was up for renewal, we knew we didn’t need the protection. Meanwhile, we were interested in refinancing our mortgage to take advantage of interest rates that hit record lows.

But refinancing a mortgage comes with a host of rules, documentation and requirements, including making at least three consecutive on-time payments first.

In fact, forbearance and refinancing are both complex processes. Doing one on the heels of the other: even more complicated. But it can be done.

Here’s what to expect when refinancing mortgages in forbearance.

Ending a Mortgage in Forbearance

To end the mortgage forbearance, our lender gave us two choices. We could pay the missed payments in full or defer them until the end of the mortgage.

We chose the latter option, kicking off a series of errors that eroded our trust in our lender and convinced us we needed to refinance to get away from them.

Our mortgage lender didn’t process our deferral application for two months. Meanwhile, we’d resumed making monthly mortgage payments on their instruction.

But the mortgage payments went to the deferred amount, not the balance. Our monthly statements indicated that our payments were both late and unapplied.

We called the mortgage lender weekly, spending hours on hold or being transferred to different departments. A sympathetic call center agent would promise to get to the bottom of things and call us back the following day.

This wasn’t the first time our lender misapplied payments.

Before we sent in a check for an escrow shortage, I called to get instructions to make sure the payment would be correctly applied. I followed their instructions to the letter, but they applied that check to my principal, not the escrow shortage. Here they were again, messing up our payments – and potentially delaying the whole process by making it look like we hadn’t made timely payments. After forbearance, you are required to make three months of on-time payments before you can apply to refinance.

At the end of our ropes, we filed a complaint with the Consumer Financial Protection Bureau. That got their attention. Top brass resolved the issue, but we planned our escape.

Want to Refinance After Forbearance? It Pays to Shop Around

When our 3-month period was up, we chose four mortgage lenders using a comparison service, then compared interest rates and loan terms.

Three lenders had online home loan applications for mortgage loans backed by Fannie Mae and Freddie Mac. We entered our income, debts, and assets – everything including retirement and bank account balances, my wife’s student loans and our car note – then clicked send. Within the hour, we were getting calls from these lenders.

Here are the mortgage rates we were offered for a 30-year mortgage backed by Fannie Mae or Freddie Mac:

1. M&T Bank: interest rate of 2.875%, APR of 2.998%
2. Chase Bank: interest rate of 3.375%, APR of 3.602%
3. Citizens Bank: interest rate of 2.625%, APR of 2.785%
4. Local bank: interest rate of 3.125 on a 30-year mortgage or 3% on a 20-year mortgage (These quotes were given over the phone with no document review.)

In every scenario, we would need to pay closing costs, which lenders estimated in the $5,000 to $6,000 range. Some required us to pay for a credit report or an appraisal.

Since the rate on our 30-year mortgage was 4 percent, a refinance wasn’t going to be a huge money saver every month. But lower monthly payments were no longer our primary reason to refinance our mortgage.

We were tired of poor service from our current lender. We needed to have a mortgage lender we could trust, even though it would take around two years for us to recoup what we spent in closing costs and start saving money.

In the end, we chose Citizens Bank because their new loan terms were better and we’d both been customers for 10 years. Within a week of receiving quotes for mortgage loans, we committed to Citizens Bank to lock in our rate.

Forbearance to Refinance Time Frame

It was October of 2020 when we came out of our forbearance period and January 2021 when we comparison shopped for refis. We locked in our new rate at the end of January.

Our new loan officer said we’d close around April due to increased demand for both refinances and new home purchases. We would hear nothing for a long time, then there’d be a flurry of information requests, then we’d have our closing. In the meantime, all we had to do was make mortgage payments on time and avoid new debt or credit score changes. Oh, and clear up our current lender’s typo that made it seem as if we owed $80,000 more than we did on our home loan, something flagged by our credit report.

On March 23, we received a message: Our loan was moving to underwriting for initial approval. Due to high volume, they expected the closing to take place 120-150 days from our initial application.

April turned into May. Meanwhile, my wife got a new job offer. If she changed employers before we refinanced, we’d need to wait an additional 30 days due to their employment verification requirement.

The job offer lit a fire under our lender: Hours after she notified the lender of the new job offer, our loan was conditionally approved.

The bank needed us to confirm the new loan terms, including escrow for homeowners insurance and town tax payments. We also needed to confirm our town taxes were currently paid in full, provide updated pay stubs and explain our side hustle income.

My wife had to get on the phone with a credit reporting agency and our current lender to verify that we hadn’t made any late mortgage payments.

It ended up taking several more phone calls, letters and confirmations but by May 17, we’d officially refinanced.

Putting Mortgage Forbearance Behind Us

It took longer than I expected to move from COVID-19 forbearance through the refinancing process. There were days when we had to drop everything and gather paperwork for our new lender, or put everything on hold to attempt, for the 27th time, to clear up our mishandled account.

At the end of the day, our mortgage payment is $100 less, but over the lifetime of the loan, we’ll save $50,000 thanks to that lower interest rate. Getting away from a terrible lender I didn’t trust to do anything right? That was priceless.

The Penny Hoarder contributor Lindsey Danis is a Hudson Valley, New York, writer who specializes in food, freelancing advice, and personal finance. Her work has appeared in Business Insider, NextAdvisor, Greatist, and more. 

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