A short refinance is a way to prevent foreclosure when you are in dire straits. A lender forgives up to at least 10% of your existing mortgage and provides you with a lower balance. It’s a much more optimal solution because foreclosure means a loss for both the homeowner and the bank because you could end up homeless and the bank would lose the money invested in the home. However, refinancing in this manner means a sharp decline in the value of the home and leaves little room for profitability after the home is sold. Here are some things to know before you consider short refinancing.
What Requirements Do You Have to Fulfill Before a Short Refinance?
Like any kind other refinance options, a lender requires 12 months of on time mortgage payments. Establishing a level of trust from the start will make refinancing a bit easier even if it’s a loss. Be sure to correct any delinquencies in your payments. If you find that there are some errors in your credit report keep your records on hand and even consult your credit bureau. Missed payments halt the process and will cost money to clear up. Remember, the lender has the ultimate say-so if he deems your situation severe enough to consider. That’s why the home needs to be in a negative equity before you go to a lender for assistance.
Refinancing in This Manner is a Bit Risky
Of course, all refinance types have their own risks but this is a very unique request. Unlike a conventional refinance situation that lowers your monthly mortgage payments with the hope to put value back in the home, the lender takes a chance on you. Why? You are asking them to pay percentage of your mortgage that may have very little profit after a sale. Most lenders require you to have a substantial amount of equity to save their own hides and as a result, they are really taking a chance because they can lose some money in the process. Convincing them will not be an easy matter– it’s like trying to move a huge boulder uphill– it’s just not sensible to the average lender. In any case this is not a full proof solution. You could end up homeless dancing for pennies but…. hopefully not to that extreme. You get the point; no guarantees. Also, a foreclosure can ultimately neuter your chances of doing business with someone else in a credit situation. It’s a long and hard process that could ultimately lead to defeat.
Why Should You Be Aware of FHA Guidelines for This Refinance Choice?
In addition to complying with a typical conventional refinance you should also be aware of the federal guidelines. Ask a lender the state requirements of residency before you decide to refinance. Sometimes it may be helpful to do a short sale to help salvage any remaining value in the home. A short refinancing using federal loans does not take very long to process which is a good thing because you certainly do not have a lot of time to save your home when you’re on the brink of foreclosing with the mortgage.
Pros and Cons of a Short Refinance
This option does help give you a reduced monthly payment, prevent foreclosure, a possible lower interest rate, and ultimately could help raise your equity. However, it should be a last resort; you should only choose a short refinancing option if you have no other option left. Financial relief is not guaranteed and you could ultimately lose your home waiting for the refinance to process.
One major con that happens as a result of a short refinance is it decreases your credit score. Having a good credit score is necessary for a number of things such as financing a car, a house, or any major purchase. Without a quality credit score it’s much harder to appeal to lenders when you are looking for approval. Lenders will question why your credit score is low and may become leery to work with you. After a short refinance it’s going to take a while to replenish your credit score and that’s not an easy feat. Seriously, do your research and consult other lenders to see if there are more options on the table like a federal streamline to help save your home.
Be sure to weigh the pros and cons of a short refinance. Know that nothing is guaranteed– the lender may pass on your application because it would put him in a financial bind with nothing to gain. A short refinance does lower mortgage payments and keeps you from foreclosure. However, there’s not much else to gain especially when it affects something important like a credit score. See what other options your lender has available that doesn’t require you to take such a risk.