If you’re facing hardship and find yourself stuck with a jumbo mortgage and a high interest rate, one strategy that could lower your payments is to go for a Short Refinance or ”Short Fi“, to get your mortgage under the conforming loan limit.
In a Short Fi, the lender accepts less than the full amount owed on the mortgage, for a cash out of the loan. The money is supplied from a new source so two lenders have to agree. If the original lender accepts a buy out for a loss, and the second lender can bring the mortgage under the conforming loan limit, it can resell the loan to either The Federal National Mortgage Association (Fannie Mae) or the Federal Home Mortgage Corporation (Freddie Mac). Because both Fannie and Freddie are government sponsored enterprises founded to encourage home ownership, the second lender is off the hook, and the borrower gets a lower interest rate.
Don’t expect that simply by getting a new conforming loan, you’d qualify for the Obama Affordability Plan to modify your loan further. Under that program, your mortgage had to have originated before January 1, 2009.
Short Fi’s are for borrowers facing hardship. They work best in areas where house prices have declined precipitously like parts of California’s high deserts where home values have dropped to the lowest seen in 20 years. Many banks in areas like these simply don’t want to own any more houses. Real Estate Owned Properties (referred to as “REOs”) in the U.S. are soon expected to hit 1.5 million.
The conforming loan limits in the U.S. are set at $417,000 for more most of the lower 48 states, with $729,750 in high cost areas like California. In Alaska, Guam, Hawaii and the US Virgin Islands, the general limits are $625,000, topping out at $938,250 in high cost areas. Your new mortgage has to be less than these amounts to qualify.
Here’s a quick guide to determining your home’s current value. If you’re having trouble making your mortgage payments, a refinance is your best option, because it fully preserves your credit rating. Loan mods are next. They are usually easier to get than Short Fi’s, because the lender still keeps its money making asset. However a Short Fi is another tool that you can use to try to save your home, especially, if the transaction lowers you mortgage to a new one that slips under the conforming loan limit.