Refinancing to Avoid Foreclosure

Refinancing involves taking another loan to cash out the current mortgage property that is facing foreclosure.

Refinancing is used to avoid foreclosure with its associated legal cost and it is also used to convert short term, in-affordable fixed / variable rate mortgage finance into a long term affordable fixed / variable rate mortgage finance.

The lenders also benefit because they can avoid the time and costs involved in a foreclosure process and can cash out the mortgage immediately.

There are two options for home owners to refinance their property when they are facing a foreclosure – Refinance using the FHA, Federal Housing Administration plan or refinance using other lenders/ banks. The key in both of them is to act quickly to get refinanced and avoid foreclosure.

The FHA – Federal Housing Administration Govt plan can be used by some borrowers to refinance their mortgage payments but the current lenders participation in this program is left to them. The current lender needs to cash out the property at a value that is around 10% less than its current estimation and borrowers can enter into a long term (like 30 years) agreement with FHA. But there are other limitations in this program as well, like sharing the rate of appreciation of your property in the future with the Government, etc.

There are many private banks and lenders who specialize in foreclosure refinancing. Many lenders may refinance a foreclosure based on favorable credit report, stable income, value of the loan and a decent equity in the property.

Some of these lenders have lenient terms and may be open to refinance the mortgage property. Its important for borrowers to explore all options of refinancing before deciding on a foreclosure.

In many cases, a constant income source and 10-25% of equity in the mortgage property may be enough. It is also important to consider refinancing options in the early stages of foreclosure (when two mortgage payments are missed) as that enables borrowers to negotiate a lower interest value for the new loan.

The advantages to borrowers due to foreclosure refinancing are follows:

  • They may get a lower interest rate.
  • They may get a longer term loan and hence their monthly payments are reduced.
  • They can switch from variable interest loans to fixed interest loans or vice-versa.
  • The number of credit points reduced due to refinancing is much lesser than what would be reduced due to a foreclosure process.