About Short Refinance

• If a lender approves a short refinance, it probably won't be because you went through a divorce. In a short refinance, the mortgage lender forgives some debt on a home worth less than the mortgage and gives you a new loan. For example, if you bought a home with a $200,000 mortgage that is now worth $150,000 and you owe $180,000 on the mortgage, the lender would forgive $30,000 and issue a new loan for $150,000. Lenders rarely approve short refinances in any situation because it means the lender loses a huge amount of money. Also, even if you went through a divorce, you both legally owe on the mortgage as long as you both put your names on the mortgage or live in a state that makes both spouses liable for martial debts.
  
  

FHA Short Refi

• The Federal Housing Administration (FHA) came out with a short refinance program in 2010. If lenders complete a deal under the FHA short refinance program, they receive compensation from the government, so lenders have more incentive to work a deal under this program should you qualify. Your marital status has no effect on eligibility. Instead, you must be current on an underwater loan not guaranteed by Fannie Mae, Freddie Mac, FHA, VA or USDA. However, you must contact your lender about this program because only the lender can approve an FHA short refinance.
  
  

Considerations

• Very few banks can follow the guidelines for the FHA short refinance program. Actually, only 23 lenders in the U.S. had modified a total of 44 loans under this program as of March 2011 -- six months after its introduction, according to The New York Times. If your home does not qualify for the FHA program, you must prove to the lender that a short refinance is the most profitable option to all parties involved, such as the mortgage broker and investors who own your mortgage.
  
  

Tip

• If you are going through a divorce or are in a dispute over property and bills, keep current on the mortgage, which saves your credit and keeps you eligible for the FHA short refinance program. Talk to your lender immediately about a short refinance because Congress proposed closing this program in 2011. At the very least, your lender might suggest other programs that help you avoid foreclosure. For instance, if you cannot afford the home at all, you might receive $3,000 to let the home go to foreclosure and relocate. If you receive a short refinance, you may owe taxes on the forgiven debt. However, the IRS forgives debt on most residential mortgages in 2011 under the Mortgage Forgiveness Debt Relief Act.