After the real estate market bubble burst, many homeowners were left scrambling trying to make ends meet, with a home mortgage that was suddenly worth more than the actual house. The equity they previously had was gone, replaced with the stress and worry of a home that had suddenly become a taskmaster. To combat this rising problem, the Obama administration created Making Home Affordable. This program is actually an umbrella term for all the programs created to help struggling homeowners. One of these creations was given the name of the Short Refinance because it is somewhat of a cross between a short sale and a refinance.
How Does the Short Refinance Work?
This particular refinance works like standard FHA refinances, meaning that the lenders will follow the same underwriting guidelines and qualifications required for approval. However, unlike traditional refinances it is targeted specifically to homeowners who owe more than the home is worth.
In a short sale the home is sold for less than the mortgage amount and the lender is basically forgiven the extra amount. With a short refinance, it is a similar principle, but instead of short selling the homeowner refinances. The refinance makes it possible for the homeowner to reduce the interest rate and mortgage payment, and as a part of this process the lender agrees to forgive part of the debt. The program requires that the homeowner be left with a home mortgage that is no more than 97.5% of the home’s value.
Qualifications and Requirements
In order to qualify for the short refinance you have to meet a certain list of criteria, which has been decided on by the Federal government. First off, this loan is only for homeowners who have mortgages that are secured through conventional lenders. When you take advantage of this refinance your loan is refinanced and switched to a loan that is federally insured. It’s also required that you have a clean criminal history for the last ten years. Unfortunately if you have criminal activity in your past you won’t be considered for this program.
The guidelines for the short refi also state that you need to live in the home you are refinancing. It has to be your primary residence, not a second home or rental property. You must also be underwater on the loan but at the same time, it’s essential that you be up-to-date on all of your monthly mortgage payments. Your financial history is going to help them determine whether or not you are eligible and if you have missed payments in the past or are trying to make up for missed payments, you are too big of a risk and they won’t be able to include you in the program.
As a last requirement, it is written into the program guidelines that you cannot have more than fifty percent of your income tied up in monthly debt. This is your total debt, not just the mortgage payment. When you refinance the house you’ll need to be able to show that you can still meet the required payments. Debt-to-income ratios that are higher than fifty percent are a red flag; too many homeowners are not able to meet the monthly payment when they have excess amounts of debt.
If you feel like you are a good candidate for the short refi program then you’ll want to contact your mortgage provider and see if they are willing to assist you in getting approved. Federally approved lenders are not required to follow the program, which means that they don’t have to give you this option. However, many of them are willing to utilize the program because while they do forgive some debt, they aren’t completely losing out on the entire mortgage. Sometimes losing a small amount is better than the risk of losing a large amount. You also need to know that this is a refinance that will more than likely have a negative impact on your credit. While it isn’t a short sale on the home, it is a cry for help and an admittance that the mortgage has gotten to be more than you can handle. If you do a short refi the lender will report it to the credit bureau and your credit is going to reflect that.
This program isn’t a perfect solution for homeowners who owe more than they would like, but it is a better solution than a short sale or foreclosure. The negative repercussions won’t be as long lasting and there is a good chance that this particular refinance could be the key to saving your home.