Short Refinance

A Possible Solution When You Need Payment Relief
And Owe More Than Your Home Is Worth

What Is A Short Refinance?

A short refinance is a mortgage transaction in which the lender accepts a payoff that is less than the amount of the existing loan balance, usually due to the borrower’s financial condition, the property’s condition, market conditions, or a combination of all three.

For example, if you own a home that was purchased for $450,000, and it’s now only worth $300,000, in a short refinance scenario, the lender would allow you to refinance and accept a $300,000 payoff – the amount that’s equal to your current value.

What’s The Lender’s Motivation For Accepting A Lower Payoff?

There are a number of factors considered, but the overriding question is will the lender net more money by approving a short refinance than by foreclosing? In most instances this is the pivotal question. However, there are additional factors considered:

  • Was the property purchased or refinanced at the top of a seller’s market and has now dropped in value?
  • Was there a previous refinance based on an over-inflated property appraisal report?
  • Is the property located in an area where property values have dropped due to a dramatic change in local economic conditions?
  • Has the property's value decreased to an amount that's below the loan balance due to local and national economic conditions that are beyond the borrower's control?


Are These All Of The Factors That A Lender Considers?

No! This list is provided to give you a general idea of what the lender considers in making a decision to accept a short payoff on a refinance. These factors are not all inclusive.

What Are The Consequences Of A Short Refinance?

In the previous example, where we stated that you owe $450,000 and the lender accepts a $300,000 payoff, the lender forgives $150,000 of your debt. The IRS considers forgiveness of debt as income. As such, there are likely to be tax consequences if your lender approves a short refinance.

MAKE SURE YOU CONSULT WITH A TAX PROFESSIONAL BEFORE CONSUMATING A SHORT REFINANCE. YOUR POTENTIAL TAX LIABILITY REQUIRES CALCULATIONS THAT ARE BEYOND THE EXPERTISE OF MOST LENDERS OR LOAN OFFICERS.

Short Refinance Inquiry

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