BillRant: Reduce Your Bills

The honest answer to that is, “sometimes, but not very often”.  That doesn’t mean it’s not worth a shot though.  I will do my best to outline the process, as well as some of the pros and cons as I know them to be.

First, you must realize that the process can be long and tedious. The typical process works like this:

1. Typically the process will initiate with you inquiring about a loan modification or some other type of workout (e.g. short sale).  This is typically done through your lender’s loss mitigation department.   Short refinances are still fairly new and relatively uncommon, so you may want to ask for them by name.  Regardless, the process typically starts the same, which is outlined next.  If you have a proactive lender or investor they may actually contact you first, but don’t count on it.  Remember, the old saying, “the squeaky wheel gets the grease”, just be sure that you’re cordial.
2. If you agree to proceed you will have to submit a bunch of financial information, which will likely include some or all of the following: a financial analysis worksheet, hardship letter, pay stubs, tax returns, bank statements and more. Sometimes they ask for gross income, other times they look at net (I will never understand why they look at gross income).
3. Your house will be reappraised and your credit ran.
4. Now that you’ve submitted your information your lender will typically work with the investor who owns your mortgage. It’s important that you understand what this really means. Basically, when an investor agrees to a short re-fi they are willing to take a loss now on some of their investment. This may be a difficult pill for some investors to swallow. That said, if you have a proactive investor they may want to take the loss now.   One reason may be so they can into an FHA backed mortgage.
5. If the investor approves the short re-fi you’ll now move to the next phase, which in most cases is qualifying for a new FHA mortgage.  There are certain guidelines for qualifying for an FHA backed mortgage, but I won’t go into those in detail here.  You can find out more on, http://www.fha.com/debt_to_income_ratios.cfm.  Whoever you’re working with at your lender should run all these numbers for you.
6. If your FHA mortgage is approved and you only have the one mortgage you will now likely sign your loan papers and have a closing date set.  If you have a second mortgage that will not be paid off then your lender will submit a subordination request.   Once approved you will move to closing.

The pros:

• A short re-fi is basically a short sale to you, which means you get to stay in your home.
• Since a short re-fi is a principle reduction your home’s value is now likely much closer to the actual market value.  Obviously if you still have a second mortgage or a home equity line you have to add those to the LTV (loan-to-value).
• Most of the time a short re-fi WILL negatively impact your credit since the lender will typically report to the credit bureaus that you’ve, “Settled for less than amount owed”.   The total impact this may have depends on your situation.  It typically has less impact than a foreclosure, but again this depends on your situation.

The cons:

• Since your credit will be negatively impacted future loans may be at higher rates or even difficult to obtain.
• For the same reason a new mortgage may be difficult or impossible to obtain.

Q&A

Q. My mortgage is upside down by more than 5% can I still qualify?
A. The short refinance explained here are not part of any government bailout, but rather a workout between you, your lender, and the investor who owns your loan.  Therefore, they are going to set the guidelines.  I would presume that short refi’s are more common the more upside you are.

Disclaimer: This is by no means a complete article, nor should it be construed as personal advice.  Everyone’s situation is unique and you must evaluated on a case-by-case basis.