A short refinance is a new type of FHA loan (FHA exception) that has recently emerged due to the economic conditions. Basically it is refinancing your current mortgage for less than you owe.
This type of financing is being rolled out to forestall the high number of short sales and “strategic defaults” that are very costly to lenders.
A borrower may want to check this out, before making a decision to short sell their residence or simply walk away. This is a very new loan product, so here’s how it should work, in theory.
The home owner should call their lender to find out if they are participating in the short refinance program. If so, find out if their current lender is actually doing those loans, of if you need to find an outside lender. IF your lender is participating in this program but is not doing these loans, get a pre-qualification from an outside lender. Here are some general guidelines before you go any further:
- The house must be detached (no condos or town homes). It must be a single family home.
- The borrower must be current on the loan with no prior delinquencies.
- There is NO cash out permitted.
- The borrower should have good credit (in most cases 680 or better for FHA)
- The borrower must be able to demonstrate that the current loan payment is a hardship.
IF you have a pre-qualification with an outside lender (assuming your current lender will not do this loan), call the loss mitigation department of your current bank to let them know to expect a call from your new lender. Your new lender will handle the paperwork on your behalf from this point forward.
In general, here’s what you should expect:
- A list of documentation required to actually qualify you for the loan (remember a pre-qualification is based on what you tell a lender – but the actual approval requires paperwork to prove information such as income, bank balances, etc.)
- Be sure to get ALL requested paperwork back to the lender as quickly as possible because your paperwork will also be used by your existing lender to determine if they want to allow the short pay off.
- If the home owner currently has both a 1st and 2nd mortgage, this will probably be more difficult to negotiate than those with only one loan.
- There will be an appraisal required. FHA will allow up to 97.5% of the current home value – so your lender may have to be willing to permit a very much lower pay off. (If you have a 1st/2nd mortgage combo, your 2nd mortgage holder will have to be willing to subordinate their loan behind the new FHA loan – but FHA may permit more than 100% financing in this case.)
- The new loan will very likely take 60 days to close – perhaps longer. You must continue to make payments on existing loans until the new loan closes.
Remember that the new loan is an FHA exception loan product. You should expect high fees for this loan – that can be added to the new loan balance. The fees will include the usual 2.25% upfront FHA insurance PLUS an additional 1.25% (at least) for this type of financing. Of course, all other typical loan fees should be considered as well, such as title insurance, appraisal, credit report, lender fee, etc.
Be sure to work with your new lender to ensure that this loan makes sense for you because of the very high fees. If you are getting a huge principal forgiveness, it could make sense, in spite of the high fees – but this is case by case.
In Oregon, I know of one lender at this time, offering the short refinance product. If this proves to be a successful loan product, it is likely that other lenders will become involved. There are lenders in most states offering this product as well, so check around for a lender near you, or for a national lender that is participating in this program.
One last caveat – please check with your current lender first – someone in the loss mitigation department, to determine if your bank is participating in this program. As with most new loan programs, this is voluntary.