May 23, 2022
If you have an FHA mortgage and get into financial difficulty that makes it hard to make your current home loan payments, you might be wondering how to prevent the loan from going into default or foreclosure.
Should you seek a loan forbearance in such cases, or try to get an FHA refinance loan instead? In some instances, forbearance is the right course of action but in others? A refinance loan may be the right choice.
Loan forbearance is sometimes necessary to avoid loan default and eventual foreclosure. The Consumer Financial Protection Bureau defines loan forbearances as an arrangement where your lender, “temporarily to pay your mortgage at a lower rate or temporarily to stop paying your mortgage.”
This may be needed in cases where a homeowner has had a job loss, an injury or illness, or in times of a natural disaster.
A refinance loan is an option open to you for various purposes and is not offered simply to save the home. If you want a lower payment and have an existing FHA mortgage, for example, the FHA Streamline Refinance loan could be the right choice.
If you aren’t behind on mortgage loan payments you have many more refinance loan options to choose from, which is one reason it pays to contact your lender as early as possible before you miss even a single payment.
What are the basic features of loan forbearance versus a refinance loan? One crucial difference is that forbearance is strictly meant to keep you from defaulting on the loan.
Refinancing is a choice you can make at any time and does not require you to have difficulty with the mortgage as a qualifying circumstance.
When you get loan forbearance on an FHA loan you are given temporary permission to reduce or suspend your monthly payments.
But these payments are still due at some point, they are typically not “forgiven”. You are getting a new loan but rather temporarily modifying the terms of the original mortgage.
An FHA refinance loan replaces your old loan with a new one. That means a new loan term, a new loan limit, and depending on how you and the lender structure the mortgage it could also mean a different monthly payment amount.
Some FHA refinance loans don’t require a new credit check or appraisal. The FHA Streamline Refinance loan program does not have an FHA requirement for either.
But if you apply for FHA Cash-Out Refinancing you should expect to have a new credit check and appraisal. It’s smart to prepare for a refinance loan similarly to how you applied for the original mortgage; try to give yourself plenty of time to plan and save for your closing costs.