Want to keep your home? Short pay refinance may be an option

You have probably heard about the short sale process, where the lender allows the home to be sold for less than what is owed on the mortgage. In addition to the complications of needing the lenders approval (banks can take months deciding on whether or not to accept, during which time the buyer simply walks away), a buyer is needed. A short sale also does not help those who want to stay in their homes. Enter another solution: the short pay refinance.

In a short pay refinance works like this: Let’s say you owe 400,000 on your home, you are currently paying 8% interest on an adjustable rate loan and your home is worth about 330,000. You obtain a new mortgage for 330,000 or less than this amount (somewhere in the range of 80-90% of the value of your home) at a rate of 6% fixed for 30 years. Your payment decreases, you are no longer underwater, which gives you more incentive to continue paying your mortgage as you are building equity and there will be no interest rate increase in the future.

In order for a short pay refinance to work, you lender has to be willing to accept the lesser payment on your loan and the new lender needs to qualify you. Generally, a short pay refinance situation will only work if you are current on your mortgage payments but can show that you are having trouble paying. If you have fallen behind, you have much less chance of getting qualified. However, if you are serious about staying in your home, can show the ability to make payments and can find a lender willing to finance the short pay loan, you may be able to convince your current lender to accept the short pay refinance.

Keep in mind that a short pay refinance has some of the same risks as a short sale. The lender who accepted less money may report this information to the credit bureau, which will effect your credit down the road. The lender must also agree to waive any deficiencies associated with the short payment.

A short pay refinance can be a tough sell to your current lender and will likely require a well documented offer as well as careful negotiation.