A short refinance, or “short-fi” is a fairly new concept. In a nutshell, a short-fi is a refinance transaction where the new loan amount is less than—or short of—the value of the current mortgage. Unlike with loan modifications, there are two different lenders involved in a short-fi: the lender that is granting the new mortgage, and the original lender that holds the current mortgage. With a loan modification, the original lender modifies its own loan. A short-fi is different from a traditional refinance or “refi” where the monies from the new mortgage cover the entire cost of the existing mortgage. With a short-fi, the current lender agrees to accept less than the full amount owed.
In theory, a short-fi is for borrowers whose income has declined, and/or whose monthly mortgage payments have increased. The typical profile is a borrower that has a strong desire to stay in his or her home, but lacks the equity for other mortgage assistance. With a short-fi, borrowers negotiate a short refinance with their current lenders, obtain a payoff for less than the full amount owed, and refinance their homes with a new lender.
A Sample Short-Fi
Let’s say Janet owes $100,000 on a home that is currently worth $100,000. She probably won’t find a new lender that is willing to grant a mortgage for 100 percent of the value of her home, especially in this market. However, she may find new lender that will be willing to grant a mortgage for a percentage of the current value, such as 95 percent. If she is able to secure a $95,000 mortgage (95 percent of the $100,000 value), she would be short $5,000 on the original loan that’s currently in place. If the lender will accept a $95,000 pay off, and Janet secures the new loan, she will have transacted a short refinance, or short-fi, for $95,000.
Why Get A Short-Fi?
Many folks who have mortgages with high interest rates, mortgages with balloon payments or mortgages with adjustable interest rates, may wish to refinance into loans that offer more favorable terms that match their financial situations. If they owe more on their current loan than a new lender will be willing to grant for a new mortgage, and if they do not have the extra cash to make up the difference—which is $5,000 in the example above—they may want see if the lender will be willing to accept a short pay-off. In that case, the current lender would take a loss in order to release the borrower of obligation to pay back the loan.
How Easy Is It to Get a Short-Fi? Getting a short refinance is not easy. Because a short-fi results in the lender losing money on the original value of the loan, it’s often very difficult to negotiate this type of transaction. Borrowers interested in short-fi loans should contact their lenders to ask if this is an option, or ask a mortgage professional to help them out with negotiations.
The Pitfalls of a Short-Fi. There’s a significant risk of credit damage in securing a short-fi. If a lender gets paid less than the original loan amount for any reason—whether it’s because the home was sold for less than the loan balance or because the loan was refinanced for less than the loan balance—that lender will likely report that information to the credit bureaus, which in turn will probably lower the borrower’s credit score. While this may not affect the current short-fi transaction, those negative marks can stay on a credit report for up to seven years, maybe longer. This could impair the borrower’s chances to get favorable interest rates and terms on any loan well into the future. This is definitely something to consider when making the decision. A short-fi is not a quick fix. The repercussions can last well into the future.
Remember, a mortgage is a serious, long-term business agreement, and lenders are under no obligation to take losses in order to accommodate a borrower’s need for a more manageable monthly payment. Borrowers who are considering a short-fi should understand that this option was not designed for those who are capable of meeting their monthly obligations, but who simply want to lower their interest rates or monthly payments.
Because a short-fi will result in financial loss to the lender, the borrower will have to present a very strong and worthy case in order for the lender to consider this option.
