Short refinance is a short term form of refinancing where the lender agrees to forgive at least 10% of your existing mortgage and provides you with a reduced balance in a way that helps you avoid foreclosure. In a sense, it’s good for the bank and homeowner because a foreclosure can cause the bank to lose tons of money and the homeowner still has a place to live. The main gripe is the house sells far under market value, so that doesn’t leave much room for profit. Here are some things to know regarding this form of refinancing.
What Are Some Requirements of This Refinancing Method?
To qualify for a short refinance program, you must have a good record of mortgage payments for at least 12 months. It’s important to not incur any delinquencies in your mortgage because that’s a way to weed you out of the process of making your application go through. Additionally, your lender must write off at least 10% of the principal balance. Also, you must have negative equity in your home. Remember, that the lender has the choice of handling this situation. Build a great rapport with your lender first before you consider this type of refinancing.
What Kind of Issues Might You Run into Regarding This Type of Finance?
It’s a very risky situation because of the low credit and equity in the home. Lenders have to be convinced this is absolutely worth the trouble. Remember, they are going to lose some money in this type of form. This basically helps you out and they have to lower your balance. In your case, you may end up waiting quite some time for this process to go through. Also, there are no guarantees which means you could end up without a home. A foreclosure is something you definitely don’t want on your record especially if you want to do future business with the lender. On the flip side, if your bank does comply with a short refinance, this doesn’t hurt the credit score as much as a foreclosure. It’s a very complicated situation that really takes time to thoroughly gauge. You may be stuck in a rock and a hard place.
Can You Utilize FHA Guidelines?
Yes, the federal government provides people with a federal short refinancing program. In addition to conventional refinance rules, you have to abide by federal rules. For example, you have to claim primary residency in the home you wish to refinance. Always make sure that you abide by the state rules regarding the amount of years you need to live in the home. However, the advantage of federal loans is the process of this short refinancing doesn’t take as long. If you happen to do a short sale under these guidelines, you can make a new purchase rather quickly.
What Advantages and Disadvantages Arise from Applying for a Short Refinance Plan?
Some of the advantages of this refinance include: a reduced monthly payment, preventing foreclosure, more equity in your home, and possibly a lower interest rate. These elements will certainly help you out regarding your financial options when things look bleak. For a lot of people in a really bad equity or mortgage situation, this may be one of a few options left. However, this does not come without disadvantages.
One of the major disadvantages of using this refinancing method is it hits your credit score. A major credit score drop can severely affect your livelihood. If you wanted to do another refinance in the future that requires a significant amount of credit, chances are you won’t have enough reserves built up to make it happen. For a refinance like a cash out, it’s dependent on a quality credit score and equity. It could take years to re-build your credit. Any refinance you use depletes your resources, but this actually hits your credit score. A major drop in your credit score has a profound effect on qualify for auto loans, credit cards, or any other faction that deems credit as important. Be very careful and think carefully when making this type of decision. There’s also a lot of back and forth between you and the lender regarding this finance. A loan officer may have to convince the bank or lender that you’re worthy for this refinance. You could send in tons of documents that take time to process without even getting accepted.
A short refinance plan should be a method saved for dire situations. Try to avoid it if you can so you don’t put your credit in jeopardy or risk getting a foreclosure because of a lender not accepting the terms. Measure all other choices to find a more reasonable method of getting accepted into a refinance option.