If you are looking for a short term solution to your mortgage, you may want to consider a short refinance. A lender is able to forgive 10% of your existing mortgage and reduce the rate, so you don’t foreclose on the property. This is a good way to save yourself from being homeless, if you find yourself in this type of situation. Before you begin this method of refinancing, here are some things you should know.
Requirements of a Short Refinance
There are a few requirements you’re familiar with in refinancing, but also a couple things that are a bit different. First things first, a good record of mortgage payments for at least 12 months. Make sure you resolve any delinquencies in your case. If you cannot get any of the marks removed from your record, try to have a year of steady payments to show the lender that you’re in a more stable financial situation. It’s the lender’s responsibility to write off at least 10% of the principal balance. In order to get your lender to do this, you must have negative equity in your home. This is a bit different from most refinance methods because they typically want you to have a certain percentage of equity. You always want to make sure you start off with a great relationship in choosing the lender.
Why Is This a Very Risky Form of Refinance?
This can get quite dangerous due to the low credit and equity in the home. From the start, lenders have to see at this is even a situation worth helping the borrower overcome. Lenders are very tight about letting borrowers use money especially if they are going to lose money. There’s no guarantee in helping you out with your mortgage. This is risky because you could be waiting quite a long time before you even make some kind of movement towards refinancing. You could seriously be looking for the next homeless shelter if it doesn’t go through. The uncertainty level definitely makes it a bit unfavorable. No one wants to go through a foreclosure especially if the bank owes a considerable amount of money. Also, having this on your record will make it difficult for working with different lenders or creditors for things such as a car or other items that need a solid credit line. A foreclosure is something you definitely don’t want on your record especially if you want to do future business with the lender. Lenders should take note that this refinance doesn’t affect their pockets as much as a foreclosure. This is quite the situation that takes a lot of time to consider.
How Do FHA Requirements Affect This Type of Refinance?
There’s federal short refinancing available for homeowners who have federal loans. Of course, you have to abide by a different set of rules not covered in a conventional refinance. If you plan to use a federal refinance in this manner, be aware of the primary residency requirements of your state. The advantage of a federal short refinance is timing. It doesn’t take as long to refinance with federal loans. Also, you can make a new purchase rather speedily.
The Advantages and Disadvantages of a Short Refinance
Some of the advantages of a short refinance includes: reduced monthly payments, preventing foreclosure, more equity in your home, and the potential for a lower interest rate. If you are in a dire situation, this should be your last ditch effort to save your home. Consider other options before going this route. There are some serious disadvantages that can certainly hurt things outside of your mortgage.
As a result of a short refinance, your credit score drops dramatically. This will take a long time to recover, and you have to contemplate what choices you can make after the refinance clears. , chances are you won’t have enough reserves built up to make it happen. A severe decline in your credit score decreases your chance to qualify for auto loans, credit cards, or any type of situation that needs credit as collateral. Also, it takes a lot of work for it to go through and you really have to win the lender’s trust.
Save the short refinance option as a last ditch effort to keep yourself from a foreclosure. If you have other options on the table that’s not as extreme, take it if it’s well within your reach. You’ll save yourself a lot of grief.