Just your luck that you bought your dream house a few years back when real-estate prices were high. Now you find yourself with a house worth less than you owe and perhaps the payments have become too burdensome.
One way to get out from under is with a short-pay refinance, when your mortgage lender agrees to reduce the amount of principal you owe on your current mortgage balance, allowing you to refinance your home at current market value. This option offers you a way out if you’re having financial troubles and are in debt for more than your home is now worth. Your lender may be willing to help if you prove hardship and are one step away from foreclosure.
Short Pay Refinance Avoids Foreclosure
A short pay refinance can benefit you and your lender both. Before you can qualify, the lender will take another look at your credit history, assets, income and property value. If your current lender decides to forgive a portion of the principal on your existing mortgage loan, lower mortgage payments can help you keep your home. This option may be preferable to letting the property go to foreclosure, which costs the lender money.
Besides the legal fees associated with foreclosure, the lender loses money in interest payments while the property sits empty. A lender is also more likely to get back its money by reducing your principal balance. Even though this all makes sense, you need to do some real negotiating to prove that getting a new loan will get you out of financial trouble and put you on the right track.
Lower Appraisal Value Helps Qualifying
As part of the loan-application process for a home refinance, the lender will require that you get a property appraisal. There’s no way around getting a short refinance loan approved without one. An appraisal is going to cost you and comes at a time when you already may be having trouble making ends meet. However, the lender needs to know the current value of your home to consider you for a refinance loan.
If the appraisal shows that your home has dropped significantly in value since you took out your original mortgage, this gives you a better shot at landing a short-pay refinance loan. Bankrate.com suggests that before you lay out money for an appraisal fee, ask a real-estate agent to do a comparative market analysis (CMA) to give you some idea of your property’s current value. A CMA compares your property to similar properties in your area that have sold recently.
PRA Loan Eligibility
Even though you don’t qualify for a traditional refinance loan because your home has lost value, there's still the chance that you will qualify for a new mortgage with lower monthly payments. To qualify for the Making Home Affordable Program’s Principal Reduction Alternative (PRA), you must owe more on your mortgage principal than your home is currently worth. Fannie Mae or Freddie Mac must not own or guarantee your mortgage for you to be eligible.
In addition to other requirements, the home must be where you live most of the time and you must be able to prove financial hardship or be at risk of falling behind in your mortgage payments. Contact your current mortgage lender to find out if it participates in the government's loan modification and refinance programs. Participating lenders can benefit through tax savings.
Paperwork You'll Need to Provide
When you apply for a short pay refinance loan, give the lender a copy of your monthly mortgage statement, copies of your tax returns for the last two years, your two most recent bank statements and your last two pay stubs. If your spouse’s income helps make the mortgage payments, the lender will need her two latest pay stubs. Provide any other paperwork that shows a mortgage lender that you will be able to afford the reduced loan payments.
In the event you are claiming financial hardship as the reason for requesting a short-pay refinance, you should present a letter to your current lender describing your situation in detail. The more information you give lenders, the better your chances of having your mortgage principal reduced and being approved for a refinance loan.
Amber Keefer has more than 25 years of experience working in the fields of human services and health care administration. Writing professionally since 1997, she has written articles covering business and finance, health, fitness, parenting and senior living issues for both print and online publications. Keefer holds a B.A. from Bloomsburg University of Pennsylvania and an M.B.A. in health care management from Baker College.