How to Refinance With a Foreclosure & Poor Credit
Contrary to popular belief, it's possible to secure refinancing of your home before, during and even after foreclosure proceedings. For the most part, banks or other creditors who hold mortgages don't want your house, despite threats of foreclosure or actually launching the process. They want the principal they loaned you, plus interest. There are many ways to refinance your home to avoid losing it to foreclosure, including short- and long-term restructuring, mortgage modifications and repayment plans. The most common cause of losing a home is waiting too long to respond to a foreclosure notice or not responding at all.
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Instructions
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Negotiate a mortgage modification. This is when the creditor agrees to change the loan terms, usually temporarily. Most acceptable to creditors is a reduction in the interest rate or the principal or an extension of the amortization in an effort to reduce your overall payment obligations. This can be a tough sell to some creditors. A professional foreclosure negotiator may be able to help.
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Propose a repayment plan. You pay a portion of the arrearages and agree to pay the balance --- in addition to regular payments --- over an agreed-upon period (usually months, not years). If you still have a regular income and an acceptable down payment, most lenders will find this arrangement satisfactory. A typical scenario would have you pay the arrearages, plus any associated costs like legal fees, upfront and the remaining arrearages within six to nine months. A lower down payment or longer payment period might be arranged with the help of a loss mitigation specialist. A higher down payment could get you a longer repayment period.
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Contact an alternative or foreclosure lender. These firms specialize in loans to people with very poor credit, such as someone in the midst of foreclosure. The two key factors these lenders consider are your home's equity and market value. Laws and regulations vary by state, and individual lenders have their own guidelines, but if you don't have more than $30,000 in equity, and your home's market value doesn't approach $200,000, you may have trouble getting this type of refinancing. This is a short-term loan, with a high fixed rate, that allows you to regroup, reestablish credit and refinance at more favorable terms at the end of the loan.
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Research a short-pay refinance plan. The goal is to get your current lender to forgive a certain percentage of principal owed to help secure refinancing with a new lender. A short-pay refinance plan allows you to keep your home, lower your payments and eliminate your "underwater" status. The bank benefits because it is less costly to approve a short-pay refinance plan than to have you simply walk away from your home. You need to qualify for a new loan, then negotiate with the lender on the principal amount that needs forgiving.
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Investigate other options, such as a deed in lieu of foreclosure, friendly foreclosures, short sales, forbearance and bankruptcy. While not all technically refinancing mechanisms, these methods can still stave off foreclosure.
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Tips & Warnings
Most federally subsidized mortgage assistance programs, such as the Homeowner Affordability and Stability Plan and other FHA programs, fall under TARP (Troubled Asset Relief Program) and serve only homeowners with Fannie Mae or Freddie Mac mortgages. These homeowners also must be current on their mortgage payments to qualify for refinancing assistance, which eliminates many people already in the throes of foreclosure.
