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Short Sale vs. Short Refinance

A short refinance is very similar to the short sale. In essence what happens is that you are re paying your lender on the mortgage of your home less than the amount you owe. This may sound strange, but the reason a lender will accept this, is if in the event you can no longer pay your monthly payments and are facing a foreclosure, your lender will have to take the house back and try to resell it at a probable loss.  The bottom line is that your lender and the banks don’t want to have the responsibility of dealing with a foreclosed property, as they are not in the real estate business and of course they stand to lose a substantial amount of money on the property.

For example if you have a loan of $ 150,000 on your house and you are currently with ‘New Century’( this is one of the sub prime lenders that went under due to the adjustable rate mortgages that went up and had too many client who could not afford it, ) and lets say you are trying to find a solution because your house is only worth $100,000 due to property devaluation. The basic idea of a short refinance is that you are going to get a loan of $100,000 or less to pay off the current mortgage. So you would try to negotiate a deal with your current lender ( New Century) to allow that to take place, and then find new financing from a new source. For the example of this article we will say that your new lender is going to be Chase.

foreclosure consequences, short sale vs short refinance

So that is the idea of a short refinance, we are negotiating down the principal similar to a short sale, so this can give a better idea of  the similarities and the differences between the two of them. So for a short sale, someone may owe a $150,000  but the house is only worth $100,000 and they can only get a buyer to come in  at $90,000. After all the closing costs are paid the original home owner may only walk away with say, $ 82,000  for example.

So basically a short refinance is a short sale with a twist and that is you have to convince your lender that you will refinance the house and stay instead of selling it for less and offer the lender less than what it is worth. That is kind of a hurdle that the bank lenders have to deal with, if they don’t want to lose on a foreclosure or a short sale. This way the home owner gets to stay in the home and shave off of the mortgage owed. In effect this may sound like a strange concept, yet the alternatives in this dire market for the banks is basically the same, they will be facing a loss and have to deal with the responsibility of selling your home if a foreclosure arises or, will have to take a loss on the short sale either way.

The second twist is that you will have to get new money coming into the transaction. You will have to be able to qualify for the new refinancing or you will not be able to achieve this type of transaction.  The problem is if you have been missing payments on your current mortgage, this will affect your credit and will make it very difficult to get another lender to agree to financing your home. So even if you are working with a specialist who can help negotiate a good rate , if they can’t get the financing they need to close the deal, all your hopes will be gone.

So what are you going to be needing to factor in considering your new financing ?

Most likely you new financing is going to be coming from a government backed home refinancing or loan modification program. There is the FHA foreclosure prevention program that will help those in financial trouble.  There are 2 stipulations to this program, in essence  the program will help those who are facing financial hardships with a foreseeable foreclosure looming in the near future, who are current on their payments. So those who are in trouble but have not fell behind on their payments will qualify. For those who are behind on their mortgage payments, they will only qualify if they fell behind on their payments due to an increase in their rates because they were locked in with a adjustable rate mortgage in which the rates climbed to a point where they could no longer afford to keep up with the payments.

There is also the new program integrated by president Obama, The Making Home Affordable Plan. This program will offer either a refinancing for those who are still current on their mortgage payments who have fell into financial hardships, or help those who have fell behind their payments get a loan modification to prevent foreclosure. There are also a few stipulations to the program. To qualify, the loan must be financed by either Freddy Mac or Fannie Mae, the loan must be under $ 775,000, the modification is only for the principal residence, and the amount due on the first mortgage is not more than 105% of the current value of the home.

So in essence it is possible to get a short refinance and stay in your home as long as you remain diligent, do your research and talk with your current lender for options.

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