Short refinance is designed to help struggling homeowners and their lenders by reducing the loan balance left on a mortgage during a refinance. It can help homeowners avoid foreclosure, and allow the bank or lender to take less of a loss than they would otherwise. Though it is a lot like a regular refinance, short refinance is different in its structure.
Short Refinance Basics
Whenever the value of a property drops (such has it has in the last several years) it can cause homeowners to be caught in a position where they owe more on their home than what it is currently worth. A short refinance can even the scales, and lower the homeowner’s monthly mortgage payments. The way it works is that the lender agrees to take a lesser loan balance. For instance, say the purchase price of your home was 400,000, and you still owe 350,000 towards the loan balance, but the value of the home has dropped to 300,000. In order to refinance your home to its current value you would have to come up with the 50,000 to cover the balance of the remaining loan plus the closing costs of the refinance. With a short refinance the lender would be willing to reduce the loan balance to prevent the homeowner from foreclosing, which would result in an even bigger loss for the lender.
Benefits of Short Refinance
A short refinance, like other refinancing, could help lower the homeowner’s monthly payment by providing them with a new interest rate comparable to the current interest rates on other types of loans. It is also extremely helpful to struggling homeowners because it brings their loan back to less than 100%. It can also reduce the risks involved for both the home owner and the lender, and the home owner doesn’t have to worry about losing their home to foreclosure. It can also help build some equity in the home.
Drawbacks of Short Refinance
It may be difficult to get your lender to offer you a short refinance, as there will need to be proof that the lender is at risk. A short refinance can also negatively impact the homeowner’s credit score, and take up a good deal of time. Because of the nature of short refinance, the homeowner would have to completely re-apply, and provide new information, much like when the home was first purchased. There may also be some closing costs involved, in addition to mortgage insurance.
FHA Short Refinance
The FHA Short Refinance program has been put in place to assist struggling homeowner’s who may not otherwise qualify for a short refinance. This is not a government loan; rather it is backed by the FHA, which reduces the lender’s risks. To be qualified for the FHA Short Refinance, the mortgage payments must be up to date, and the amount still owed on the home must be more than its current worth. It must also be the primary residence of the borrower. The homeowner will still need to be qualified for the new loan; however, because it is an FHA program, the requirements may be less strict than conventional loan types.
By Rachel West