How to Refinance a Mortgage After Short Sale

by John from Green Lake, Wisconsin

Ask Kate how to refinance a mortgage after completing the short sale process on another property: After John's wife became ill and lost her job, they had a short sale. Then they moved back to Wisconsin to live in their second home. John asks if it's possible to refinance that mortgage for a more affordable payment.


What's the Best Way to Refinance a Mortgage After Short Sale

By John from Green Lake, Wisconsin
How to Refinance a Mortgage After a Short Sale

Kate,

We recently went through a short sale on our primary home in Chicago due to my wife's loss of job and illness.

We had a second home in Wisconsin that we now reside however the mortgage here has a large mortgage payment.

Is it possible to refinance the mortgage on this home that is now our primary home? How long would I have to wait? What if we had my son or daughter co-sign?

Ask Kate at Get-Your-Best-Mortgage-Rate.com
Ask Kate answers: What's the Best Way to Refinance a Mortgage After Short Sale

Hi John,

Moving is seldom easy. Illness adds to the complexity. I hope your wife is recovering and that you're both starting to feel at home in Wisconsin.

I'll tell you about three financing options that may help you get a more affordable mortgage payment on the home that became your primary dwelling after having a short sale.
  1. HARP Refinance

  2. FHA Refinance

  3. HAMP Modification

HARP Refinance

If your Wisconsin home has less than 20% equity, look into the Home Affordable Refinance Program. HARP is commonly regarded as the refinance option for underwater mortgages. But many homeowners are not aware that a mortgage on a house with equity can also be eligible for HARP if the loan-to-value is above 80%.

Click here for an overview of the HARP program's eligibility criteria and guidelines where you can read about minimum credit scores and the affect of foreclosure (similar to short sale), late mortgage payments, and bankruptcy on loan approvals.

Keep in mind, Fannie Mae and Freddie Mac establish these basic HARP guidelines. But lenders have the right to add stiffer requirements. These are called overlays. Read about this at HARP 2 Guidelines vs Infuriating Lender Overlays.

You can shop for competitive HARP rates among participating lenders but I'd also check with your current loan servicer for an adequate comparison.

FHA Refinance

Hopefully, your mortgage balance is under the FHA maximum loan amounts for your county. If so, look into FHA insured mortgage financing. In spite of a waiting period of 2 to 3 years after foreclosure or bankruptcy, FHA financing still offers some of the most relaxed approval guidelines, stable fixed rates, and no prepayment penalties.

You'll find help for determining your county's maximum FHA loan amounts here.

FHA Back to Work Program

While we are on the subject of getting a mortgage after a short sale, I should mention that home buyers have a dedicated option called FHA Back to Work. With no minimum credit score and a reduced one year waiting period after foreclosure, short sale, or bankruptcy, the FHA Back to Work Program supports homebuyers with financial difficulties due to unemployment, illness, or other extenuating circumstances.

Read more at the FHA Back to Work Program - Buying a Home After Foreclosure.

HAMP Modification

Lastly, you might consider a HAMP modification. This is generally a program based on hardship, although not necessarily so if the current mortgage is backed by Fannie or Freddie.

The interest rate will probably have upward adjustments in the future. But the terms could offer 5 to 10 years of lower mortgage payments until you can get back on your feet and refinance.

Read more about getting lower monthly payments with the HAMP program.

Credit and Co-Signers

I'm glad you asked if a co-signer could assist you in qualifying for a mortgage after a short sale. Co-signers can help to lower debt-to-income ratios, especially if the co-borrowers have a decent amount of income.

But it is a different matter with credit. Adding co-borrowers does not offset the negative credit of the primary borrowers. This is because most mortgage programs will not average the credit scores. Instead, the credit score that is used for approval determination is the lowest score taken from the middle score of all borrowers.

That's a mouthful so here's an example: Say that your scores are 625, 525, and 650, your wife's scores are 600, 625, and 550, and your son's scores are 700, 725, and 770. The first step is to take their three middle credit scores, 625, 600, and 725. Out of that group, use the lowest score, 600, for calculating loan approval.

So you can see that your son's stronger credit does not offset lower credit scores. However, there are steps you can take to constructively improve your credit scores and credit history.

I explain how at Improve Your Credit Score with Lasting Results and Fix Your Credit - Fix your Life.

Best wishes for your future,

Ask Kate

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What to do if lender won't refinance after I filed bankruptcy?
by: Ryan J. from Stony Creek, VA

I am trying to refinance but my lender is giving me a hard time. I filed for chapter 13 bankruptcy. Am I still eligible to refinance my mortgage?

Hi Ryan, Kate here...

While refinancing a mortgage during the chapter 13 bankruptcy process is often permissible to the courts, a homeowner is still subject to lending guidelines.

I suggest discussing this with your BK attorney to see if you could get a couple of lender referrals. FHA mortgage financing may be your best route.

Best wishes, Kate

P.S. You may also want to read To Reaffirm or Not to Reaffirm a Mortgage after Bankruptcy.

Click here to add your own comment.

You can also ask Kate about your mortgage at How to Improve Your Credit Rating with Amazing Success.

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