A Principal Reduction Short Refinance may be an option for Las Vegas homeowners who are making high mortgage payments on properties that are worth less than the amount owed.
Even though the most recent round of legislation with the new housing rescue plan does not provide for a significant principal reduction, there are still cases where a homeowner can possibly negotiate for a short payoff from their current lender and then obtain a new FHA mortgage at a lower loan amount.
Not to be confused with the “Obama Refinance” that does not allow for a modified loan amount higher than 125% Loan-to-Value of the first mortgage on primary residences, a short refinance principal reduction loan is a program where a homeowner negotiates for a reduced payoff from their current lender and then qualifies for a new FHA mortgage with a new lender.
Since a principal reduction short refinance is not the first offer the loss mitigation departments of most lenders / servicers will consider, I wanted to write a quick post that cleared up some of the confusion and misinformation that our clients are hearing from the media and reading online.
* Keep in mind, if your sole purpose is to permanently reduce your monthly payment without going through the hassles of a short refi, a quick FHA streamline may also fit your immediate needs. FHA Streamline refinances do not have a minimum credit score requirement, appraisal, income, or assets verifications. >> more about Las Vegas FHA Streamline Refinances.
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Las Vegas Short Sale Agent
FHA Streamline Refinance (not principal reduction refinance)
Las Vegas Short Sale Attorney
No Up-Front Fee Loan Modification Service
(the contact form at bottom of post works well too)
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What is a Short Refinance?
A Short Refinance is a mortgage transaction in which a homeowner qualifies for an FHA 30 yr fixed rate mortgage with a new lender at a loan amount less than the current value and amount owed on the property.
Basically, the current lender will issue a “short payoff” and write off the difference between what is owed and the payoff amount that the new bank is requiring to complete a new FHA mortgage.
This is for a new FHA rate and term refinance only, not for cash-out or debt-consolidation loans.
What If I have a first and second mortgage?
Since the new FHA loan amount cannot be greater than the current appraised value, both the first and second lien holders would have to essentially wipe away the difference without placing any further obligation on the homeowner to repay the difference.
Having multiple mortgage liens on a property will certainly complicate things and prolong the process, which is why we suggest consulting a short sale attorney that specializes in real estate contract law.
Why would a lender approve a Short Payoff?
It is typically easier to negotiate for a short payoff on a short sale transaction vs a refinance due to the hardship requirement.
However, some lenders / servicers are starting to realize that they are going to take a substantial hit if a property goes into foreclosure. Instead of taking over the costs associated with retaining a foreclosed property and assuming the risk of selling it several months later at an even greater reduced rate, issuing a Short Payoff allows the current lender to immediately budget its losses and collect a payoff amount from the new lender funding the new loan.
While the lender loses less money on the Short Payoff (compared to foreclosure), it also opens up the opportunity for that lender to re-allocate the money collected into new investments and potential profits.
Do I have to be late on my mortgage to qualify for a Short Refinance?
Unlike a traditional Short Sale, which sometimes requires a borrower to be delinquent on their mortgage payments to prove a potential foreclosure is in the future, a Short Refinance follows standard FHA lending guidelines and only works if the borrower has a clean recent mortgage payment history.
While there are some exceptions to this rule, a Short Refinance is a mainly designed for a homeowner that can fully qualify for a new loan, yet wishes to remain in their home with a reduced total loan amount.
The main challenge with negotiating a short payoff is proving that it is in the current lender’s best interest to write off a portion of loan amount on a borrower who is paying their mortgage on time.
Another option to a principal reduction short refinance if the main purpose is to lower a monthly mortgage payment, would be an FHA Streamline Refinance, which does not require an appraisal, credit check, or income / asset documentation.
Will a Short Refinance have a negative impact on my credit score?
This mainly depends on how you negotiate the terms of the short payoff with your current lender. In order to qualify for a Short Refinance, there cannot be any remaining liens or judgments placed on the borrower. If the loan is settled as “Paid for Less” then there may be an initial hit to your credit score.
Do I have to pay taxes on the amount forgiven in the short payoff?
No, the lender agrees to clear you of any past obligations to that loan by issuing a short payoff. As described in the Mortgage Debt Relief Act of 2007, the amount discharged by a lender for a short sale, short refinance, or foreclosure is not considered income.
* Disclaimer – Since there are several details to this law, please check with your attorney, CPA or tax consultant about your unique scenario.
How much does a Short Refinance cost?
The standard fees that are associated with a traditional FHA refinance apply. Generally, you can include all closing costs into the new loan amount and avoid any out of pocket expenses.
Some banks may require the cost of an appraisal to be paid ahead of time by the homeowner, so you should still budget accordingly.
Word of caution – A Short Refinance approval is based on the successful negotiation of a Short Payoff from your existing lender where they release you from all present and future obligations of the amount owed. This includes the difference in the loan amount that is being paid off by the new lender and the amount that the old lender is essentially “forgiving” due to the fact that they are agreeing to take less.
If you are unable to cut through the red tape and thick layers of department filters before you find the right person at your bank that will give you what the new FHA approval requires, we can refer to you a professional short payoff negotiation expert.
Raintree Mortgage does not make referral fees on these types of relationships, our objective is simply to get you into a new lower payment and loan amount.
Free short sale / short refinance consultations provided to My FHA Blog readers – Las Vegas Short Sale Attorney – Paladin Legal Center 838-7522, or fill out the form below.
What banks are approving / willing to negotiate a Short Payoff?
This list changes on a weekly basis depending on politics, federal funding, TARP guidelines, and neighborhood comps compared to the banks’ Net Present Value model.
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Most of our clients seeking more information about a short refinance fall into three categories:
Scenario 1: Upside down in value and able to fully qualify for a new FHA mortgage
Possible Solution: After an attempt at a loan modification and short sale, a short payoff from the current lender (s) may be granted for the purpose of a short refinance. This process can take anywhere from 3-9 months before the current lenders finally agree on approving the homeowner for a short refinance principal reduction vs a short sale or loan modification.
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Scenario 2: Upside down in value, but not able to qualify for a new FHA loan
Possible Solution: Demonstrate a hardship and apply for a Loan Modification (Making Home Affordable) or Short Sale.
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Scenario 3: Upside down in value and want to move, but need a local attorney’s help in negotiating the short sale to avoid deficiency judgments and legal ramifications.
Possible Solution: Free short sale / short refinance consultations provided to My FHA Blog readers – Las Vegas Short Sale Attorney – Paladin Legal Center 838-7522, or fill out the form below.
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**Important** UPDATED: Aug 24, 2009 –
Most of the lenders that we are working with on short refinances are still requiring that underwater homeowners attempt a short sale or a loan modification prior to asking for a short payoff refinance. However, we are starting to hear of a few short refi success stories.
Since Raintree Mortgage does not negotiate short payoffs or short sales on behalf of homeowners, we have trusted affiliates that we can refer you to.
To avoid any conflicts of interest, and to ensure our integrity, Raintree Mortgage does not receive referral fees or third party commissions from our Loan Modification or Short Sale Attorney partners.
Our main objective is to help our clients find the best plan of action.
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Yes, we hear and read the short refi hype all over the place as well. Unfortunately, most homeowners seeking a principal reduction refinance generally fall victim to a bait-in-switch game designed to sell an up-front fee loan modification service or real estate listing.
Lenders and servicing companies have a fiduciary responsibility to their investors, not the homeowner. While it may make perfect sense to you and I for a bank to reward their borrowers who are in good standing by allowing them to avoid a potential short sale or foreclosure and issue a short payoff for around 95% of the appraised value, these lenders only seem to negotiate if a default is eminent.
With that being said, lets take a quick look at the two other options that you’ll probably have to attempt prior to being granted a principal reduction refinance:
Loan Modification – Is simply a restructuring of the current terms of a loan amount to reduce the monthly obligation. There are standard government issued guidelines for both conventional and FHA insured mortgages. The main benefit of a mortgage modification is that the homeowner gets to stay in the property with a lower payment for a set period of time.
Short Sale- Is where the home is sold for less than the amount owed to a new buyer.
Both of these options require a hardship letter / package to be approved by the lender. Since there may be credit, tax, and financial implications associated with loan modifications and short sales, it is important to discuss your rights with an expert.
Whether this is a basic math / business decision, or you are struggling with the emotional weight of losing your home, we have a proprietary software that will allow us to put all of the facts and figures in a few easy charts so that you can determine the best course of action based on how long you’ll have to stay in the property to break even or start building back your equity.
examples of charts: click on image to enlarge
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I hate to follow a post like this with an (*) and disclaimer stating that there is a chance things may not work out. From personal experience, I sincerely understand the need for hope and peace of mind. Values have declined, payments are up, and nobody seems like they can give you a straight answer.
Trust me, I understand your pain. We’re rolling with the Obama Refi and Hope for Homeowners changes every day.
Fortunately, I’m surrounded by several other experienced and compassionate FHA lenders on this blog that all share the same objective for providing their local clients with the most timely and accurate FHA mortgage information possible.
Please complete the following form so that we can direct you to the right professional on our team that can answer your Las Vegas Short Refinance, Short Sale, or Loan Modification questions.
*This is not an offer to lend. 
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