Mortgage Forbearance Guidelines on Home Loans

This guide covers qualifyng and getting a home loan approval after you are in or had a recent mortgage forbearance with your current mortgage. There are times throughout your life that an emergency happens that causes financial hardship. Events like job loss, divorce, death in the family, and natural disasters like hurricanes happen unexpectedly. These events can affect income stream, causing to be late on mortgage payments as well as other bills. There are many moving parts to this topic on getting approved for a home loan after a mortgage forbearance with your current mortgage. Each agency (HUD, VA, USDA, Fannie Mae, and Freddie Mac) has its own mortgage forbearance guidelines. Each individual non-QM mortgage lender have their own independent mortgage forbearance guidelines. In the following paragraphs, we will cover qualifying and getting approved for a home loan after a recent mortgage forbearance.

Can You Get A Loan Approval If You Are Currently In Mortgage Forbearance on Your Existing Mortgage?

As with most questions about loans, the answer is it depends. For the case of mortgage forbearance, the answer tends to lean towards the affirmative if the specific forbearance is set up correctly. The following attributes help put you in a better situation and maximize your chances of accepting a loan:

Your Home’s Mortgage Forbearance Type

Suppose you enter forbearance (a pause in payment) and return to making regular payments. In that case, this is termed forbearance exiting, and lenders view this more favorably. Most likely, the forbearance period has undergone a modification, such as missing payments getting added to the loan itself, where the loan type makes a difference in your eligibility resources.

Time Since Forbearance Has Been Completed

Most lenders wish to see a set span of payments within a loan period cited previously as in forbearance before increasing the loan amount. Through countless tests over various lender scenarios, we’ve realized this season period is anywhere from 3 months to 1 full year. The factors rest on the type of loan applied alongside the situation.

How Does Mortgage Forbearance Affect Credit Scores

If reported correctly, a mortgage forbearance does not impact credit scores under the CARES Act (which was common during the COVID-19 pandemic). However, if payments were skipped and reported late before or after forbearance, credit scores could be negatively affected, impacting loan approval.  

Loan Type Requirements

• FHA Loans: Qualifying after mortgage forbearance is permitted if at least three consecutive payments are furnished post forbearance (if payments resumed) or 12 months of payments (if there was a loan modification). There cannot be any missed payments post-forbearance. 
• VA Loans: Similar to FHA loans, VA loans require 12 months of on-time payments after forbearance or modification. The VA also stipulates that the forbearance must be resolved (payments caught up or loan modified). 
• Conventional Loans (Fannie Mae/Freddie Mac): Fannie Mae and Freddie Mac have stricter criteria. If no derogatory credit event occurs, the borrower must wait 3 months after beginning payments. If the mortgage forbearance leads to a foreclosure or short sale, it can be up to 7 years. If a loan modification is required, it is subject to a 12-month seasoning period. 
• USDA Loans: After exiting forbearance, at least 12 months of on-time payments are required, and the reason for the forbearance (e.g., temporary hardship) will be considered.
• Non-QM Loans:Non-QM loans are portfolio loans. Each non-QM lender has its own mortgage forbearance guidelines.

Debt-to-Income Ratio (DTI)

The lenders will determine how a new mortgage will fit alongside your current financial obligations. Post-forbearance, having a strong DTI under 43% is crucial. However, after the borrowers meets the waiting period requirements, borrowers should be eligible for a home loan after a mortgage forbearance unless the lender has overlays on government and/or conventional loans.

Lender Overlays on Mortgage Forbearance

Lenders may have stricter rules (overlays) beyond the minimum standard for FHA, VA, or conventional loans. You may have to do some legwork to find a lender working with your unique profile.  

Steps to Improve Your Chances for a Home Loan After a Mortgage Forbearance

• Document Everything: Show proof of a temporary financial hardship (like a job loss or medical issue) alongside showing that your recovery has positioned you in a stable financial state. 
• Rebuild Credit: If your credit took a hit before applying, you will need to focus on improving it.
• Catch-Up Payments: Paying your current mortgage can show lenders you are stable.
• Work With a Loan Officer: A mortgage consultant will guide you through based on your forbearance history and the type of loan you intend to seek.  

Case Scenario of Mortgage Forbearance

Assuming you have forbearance for six months, caught up a year ago, and made twelve consecutive timely payments, you will likely qualify for an FHA or VA loan, depending on your credit and income. With a conventional loan, this wait time could be shorter, capped at three months, if no late payments were documented.

What is the Difference between Forbearance and Foreclosure

When a negative event happens in your life and you feel that your financial situation will change for the worse, please contact your mortgage lender and ask them for temporary forbearance. A forbearance is a temporary relief by lenders. Lenders will work with borrowers to suspend the borrower’s regular scheduled payment. Payments can be in forbearance until the borrower is back on his or her feet.

Example of Mortgage Forbearance

For example, when Hurricane Sandy struck the eastern border of the United States a few years ago. JP Morgan Chase and other banks developed a natural relief program for homeowners where they offered a 90-day forbearance until the affected homeowners recovered. Many victims of Hurricane Sandy were temporary out of work. This was because their employer were shut down due to the damage caused by the hurricane. Others had their homes severely damaged. Homeowners who lived in other states besides the east coast were affected. This was because their employment headquarters were located on the eastern states affected by Hurricane Sandy. JP Morgan Chase and other lenders were extremely understanding. They were generous in offering a forbearance to those affected homeowners. Mortgage payment history on borrowers credit report were not reported late.

Requirements For Mortgage Forbearance

One of the requirements of being granted a forbearance is that the homeowner be current with their mortgage payments when requesting a forbearance. If you are behind on mortgage payments and request a forbearance, the forbearance request will not be granted. So if you anticipate any financial hardship and think you will be late with future mortgage payments, you need to contact your mortgage lender immediately. See what types of programs they have to offer. Lenders do not want your house. They want to work with homeowners and will do anything possible to work with them. Repayment plans can be adding the arrears amount back to the loan amount or an extended payment plan. I strongly recommend contact not just your lender and all of creditors as well prior to being late. They will appreciate it and will be more willing to work with you.

Mortgage Forbearance Versus Loan Modification

A mortgage forbearance is when the lender gives the homeowner some time to get their finances together due to the following:

• Loss of job
• Medical reasons
• Gap of employments
• Divorce
• Other extenuating circumstances

Mortgage forbearance is normally short-term workouts on homeowner’s loans. Once the forbearance period is over, the homeowner can pay the amount in arrears all in one lump sum or make payments over a short period of time. With loan modifications, the homeowner is not required to pay the amount in arrears. This is because they do not have the means to catch up on their arrears.

How Mortgage Loan Modifications Work

Here is how loan modifications are done:

• Lenders will want to see the homeowner’s financials and the reason why they fell behind
• The lender will come up with a reduction of the homeowner’s monthly PITI.
• The reduction is normally done by the reduction of interest rates or extending the term of the home loan
• There is normally a three-month trial period
• If the trial period is successful, the loan modification is finalized
• The payments that are behind can either be forgiven
• Or added to the back of the loan
• Or spread out for a certain period of time with a loan modification

Qualifying For FHA Loan After Mortgage Forbearance vs Loan Modification

Homebuyers can qualify for a FHA Loan After Loan Modification one year after the loan modification and need to provide  the lender with 12 months of timely payments. Homebuyers can qualify for a FHA Loan with no waiting period after a mortgage forbearance. But most lenders want to see 12 months of timely payments. Borrowers can qualify for FHA loan with prior mortgage late payments. But most lenders want to see timely mortgage payments in past 12 months. Many lenders will not accept borrowers who had a 120-day late payments on mortgage. This is because they consider this a pre-foreclosure even though foreclosure proceedings were not initiated. This is not a HUD Guidelines but a lender overlay. Borrowers can qualify with a 120-day mortgage late payments as long as it has been seasoned for 12 months

Borrowers who had 120 days late payments on their mortgage payment history but have been current for the past 12 months and are denied a FHA loan can qualify for a mortgage.  If borrowers are told that is a pre-foreclosure by lenders, they are wrong. Please contact us at Mortgage Lenders for Bad Credit at 800-900-8569 or text us for a faster response. Or email us at alex@gustancho.com. The team at Mortgage Lenders for Bad Credit is available 7 days a week, evenings, weekends, and holidays.