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Borrowers who owe more on their homes than their homes are worth typically cannot qualify for a conventional refinance, but FHA guidelines may provide refinancing if the existing lender agrees to accept less than full payoff.

Short Refinance Option Assisting Homeowners

If your mortgage is more than your home is worth, you may find a solution that allows you to keep your home while adjusting your mortgage to reflect current home value. Similar to a short sale, a short refinance on an FHA loan allows homeowners to refinance up to 96.5% of their home's current value provided your existing lender agrees to write off any mortgage debt in excess of your maximum FHA loan amount. Although getting a short refinance approved requires coordination between your current lender and the refinance mortgage lender, this process may take less time than going through government-sponsored modification programs. Best of all, you won't be forced to sell your home as you would with a short sale. Here are the FHA guidelines for completing a short refinance:

  • There must be no late payments on your current mortgage, and the loan must remain current during the refinance process.
  • The current lender must agree to accept the proceeds of the FHA refinance mortgage as full satisfaction of your mortgage.
  • You'll need to order an appraisal for determining your home's current value
  • The current lender must execute a non-recourse agreement stating that it will not pursue a deficiency judgement against you after the refinance loan closes.
  • You must fully qualify for your refinance mortgage according to FHA guidelines.

Your mortgage lender will likely require documentation of financial hardship beyond your control to justify accepting a loss on your existing mortgage. Lenders may ask for:

  • A signed letter explaining your circumstances and why you're requesting a short refinance transaction,
  • Copies of pay stubs or itemized deposit advices for the most recent 2 to 3 months,
  • Copies of 2 to 3 months most recent bank statements,
  • A financial statement showing all income and obligations,
  • Copies of 2 years most recent tax returns,
  • Other information as required by your existing lender.

It pays to gather most or all of this information before contacting your lender. This can save time and prevent delays in processing your request. While a short refinance can help reset your mortgage to reflect current home values, there are some drawbacks. Your credit will take a hit when your lender reports "settling" your mortgage. Consulting a financial advisor can help determine if a short refinance is in your best financial interest.

Karen Lawson
Karen Lawson is a freelance writer with extensive experience in mortgage banking and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.