What is a Short Pay Refinance?
That is when your current mortgage lender agrees to refinance your existing mortgage but for an amount less then what you owe. As an example: You currently owe $120,000 on a mortgage at 6% but the home is worth $100,000 and current rates are less then 5%. Your current mortgage lender would agree to accept less then the $120,000 owed to satisfy the old mortgage, maybe they would take $100,000. Normally there would have to be a hardship involved, I am unaware (right now at least) of any lenders doing this just to allow a customer into a lower rate. You would have to call your lender to see if they would allow this, if not you might be eligible for a refi under HARP. If you are having a hardship it would be best to call the lender as well.
A Short Pay Refinance is very similar to a Short Sale in name and steps required. Although a Short Pay Refinance may have been a better option for certain borrowers than just walking away from their property, this option has really gone under the radar due to lack of Publicity and knowledge.
The goal in a Short Sale Refinance is the current Bank forgive enough principle owed in order to help a borrower qualify for a Refinance with a new lender. For the many homeowners that owe significantly more than the home upwards of 125% of the value, there are still very few options. A Short Pay Refi is unique in that it allows the borrowers to keep their home, lower their payments and eliminate the fact that they are currently "Underwater".
The idea behind a Short Pay Refinance is that all parties will ultimately benefit more than if the property goes to foreclosure. The Bank would benefit seeing that its often less costly to approve a Short Sale or Short Pay Refinance than to have the home occupant just walk away. The Foreclosure processes costs the Bank additional interest while the property is vacant and lawyer/court fees associated with filing all the appropriate paperwork. There is also costs to the economy as more Foreclosed properties end up back in the hands of the lenders. The Homeowners benefits are that they are able to keep the property they purchased while making their payment more manageable. The way a Short Pay Refinance reports in a credit report does significantly less damage than the drop seen with a foreclosure.
The homeowner must be able to qualify for a new mortgage. Firstly, the Income, Credit History, Assets and Subject Property Home Value are reviewed to verify that a new Loan could be made. With a new loan amount now in hand, the next step would be to negotiate with the Bank on what amount of principle would need to be forgiven. If the lender accepts the terms than a new loan is completed. No Mortgage lates can have been reported when applying for a Short Pay Refinance.