Short Pay Refinance loans.
Another option that is increasing in popularity for homeowners is a Short Pay Refinance loan. This is beneficial as it will lower the borrower’s monthly payments on their current mortgage and provide them other benefits as well. While the process is similar to a short sale, the home is not sold but rather the loan is refinanced with a new bank or lender. So the person gets to keep their home. Find more information on this option below.
How does a short pay refinance help the homeowner?
There are two big advantages here. With a Short-Pay Refinance loan, the mortgage lender or bank will agree to provide the homeowner with help. They will in effect discount the loan balance and therefore offer the client lower monthly payments. They will only offer this program if the homeowner is facing a financial hardship. So the first reason to consider this is the monthly savings on the existing home loan.
This is is great option as it allows the borrower to not only keep their home, but they will receive lower payments, possibly waive fees, and it will eliminate the “upside down” equity in their homes by reducing the principal balance on their mortgage. So the ability to keep the residence is obviously the second advantage. The homeowner will not need to move, or even worse, face homelessness. All of this is done as the borrower will finance their existing mortgage with a new lender.
Who should apply for this?
This is usually a very good choice for homeowners who still have some type of income and decent credit scores. It is not usually the best option if someone is way over their heads on all of their bills or debts and experiencing an extreme financial hardship. For borrowers who have experienced a decline in the value of their home, and now owe more than it’s worth, a Short-Pay Refinancing may also be the best solution in those cases as well. The federal government FHA also supports this program.
Lenders and banks are becoming more willing to provide this option if the interest rate on the borrowers current loan is scheduled to soon increase. This will negate, if not completely reverse, that future increase. They will often consider this as well if the borrower is experiencing some type of short term financial difficulty.
Once again, this is not the best option if the homeowner is way behind on their mortgage and it is not realistic for them to catch up. It is also not a good idea if they have an extreme crisis in their financial situation. Note some government agencies, such as the FHA, also have principal reduction programs which can eliminate the need for a short pay refinance loan. Click here to learn more.
How does the Short Pay process work?
Further information on the process is as follows. It is usually a three part procedure. First, you will need to get an appraisal to determine how much the home is worth. Then negotiations must occur. You can use the services of a professional, broker, or mortgage counselor for both the appraisal as well as negotiations.
Once found eligible, the mortgage broker will underwrite you for a new loan at the maximum LTV for that new value. After a review is done of the client’s financial condition, they will issue an approval on your application. This in effect funds the new mortgage on the property.
The last part of the process is after you have your new home appraisal and the approval from the mortgage broker, you will be able to enter into equity re-negotiations with your bank or lender. Or the borrower can find a new lender for this step in order to get a discount on the current mortgage. This discount is in effect the short pay refinance loan. As states and local governments roll out foreclosure mediation programs, this is also leading to an increasing number of short sale refinancing from the mediation process.
Why is a short pay refinance an option for lenders?
The bottom line is that banks loss less money in this scenario. So they often support this option. Lenders and banks are more willing to negotiate with borrowers to find some type of solution that will both benefit the lender by reducing their loss, and also help the homeowner keep their home.
The foreclosure process is very expensive to all parties involved. Not only does it require large amounts of expensive legal fees, in addition to those costs the home is usually sold at a substantial loss by the bank. So all of the banks that service home loans are usually willing to look at any solution that limits their loss.
So not only does a Short Pay Refinancing save the bank or lender money, it also allows the lender to provide the homeowner with mortgage help. This is good for the family living in the property, the community, and it reflects positively on the bank’s PR department. It helps the loan servicer avoid a majority of the legal fees and lets the new lender make its the largest loan possible that is based on the fair market value of the home. So it is a win-win situation for all of these various groups.
In addition, as mentioned above, a short pay refinancing also places the borrowers into better positions so they can gain long term financial stability. It is usually better for them than a standard loan modification. It will generally help them avoid a foreclosure in the future as well. This is the case because it will both lower their principal balance and also lower their monthly payment. To learn more, call your mortgage servicer and ask about the process in applying for a short pay refinancing loan, as most lenders now offer this.