Refinancing strategies for financially challenging times
Life is unpredictable. It offer no guarantees, and unexpected challenges arrive.
You can live on savings for a while, but you would like to hang onto your cash for as long as possible. Can a refinance help?
In many cases, yes. Today’s mortgage rates are near all-time lows, and accommodative mortgage programs are designed to help struggling homeowners.
With some planning, you can give yourself more time to get back to a more secure stage of life.
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First things to do when you’ve lost income
When you miss a payment, a mortgage refinance can become challenging, but not impossible.
Most lenders and mortgage programs want to see clean payment history for six to twelve months before they approve a refinance. For this reason, be proactive when you encounter financially hard times.
As soon as you know you won’t be able to make a mortgage payment, contact your lender. Explain your financial situation with proof that backs up your claim. “You might provide a letter from your physician explaining why you can’t work for the next 60 days,” says Sean D. Stockell, CEO of Financial Fitness, creator of the home resources website Your Home 1 Source.
Suggest a monthly dollar figure you can pay each month. You have one important asset on your side, says Jason van der Brand, founder and CEO of San Francisco-based mortgage provider Lenda. “Most banks don’t want to foreclose on your home. But you must be prepared to answer hard questions when you try to borrow at a lower rate,” he says.
The refinancing lender will check your credit history. So, keep your credit score as high as possible by paying all your minimum payments for debts like credit cards, auto payments, and of course your mortgage.
This is tough when money is tight, but it can make a difference in making you a more appealing candidate for a mortgage refinance. Talk to stores and other creditors. Some may let you delay payments without giving you an official late payment on your credit report.
Refinancing options when you’ve suffered a financial hardship
If you are still in good standing credit-wise, you may have some options to reduce your mortgage payments through a refinance.
These options are best for those with continued income, but a different type of financial hardship such as medical bills. The reason is that you will likely have to provide your current income situation to the lender.
The lender must be able to determine that you have enough income for the payments after the refinance is complete.
1. Exchanging a fixed-rate for an ARM
You may be able to switch from a fixed rate loan to an adjustable-rate mortgage (ARM) with a much lower rate.
ARM rates are typically much lower than fixed mortgage rates, which can help homeowners save big. How much money per month could refinancing into an ARM save?
Someone with a $250,000 mortgage at a 3.75% interest rate pays over $900 per month in principal and interest. This figure does not include property taxes or homeowner’s insurance.
According to Freddie Mac’s weekly rate survey of lenders nationwide, the average 5-year ARM rate was near 2.55% as of October 2021.
At this lower rate, the homeowner would cut their payment by $130 per month.
An ARM loan is not without risk. It is fixed usually between three and seven years, then adjusts based on current market rates.
But this type of loan could be a solution to temporarily reduce high housing costs.
2. Refinance into a longer-term loan
In today’s interest rate environment, many home buyers are switching from a 30-year fixed mortgage to a loan that pays off in just 15 years.
While interest rates on 15-year fixed loans are lower, payments are higher. More principal is required each month.
But your loan term can go the other way, too.
Homeowners with a short-term loan of 10, 15, or 20 years can refinance into a 30-year loan to reduce their payments.
The amount owed for two options is as follows, based on principal and interest on a loan amount of $250,000, and a 3.5% interest rate.
- 15-year fixed-rate mortgage: $1,370
- 30-year fixed-rate mortgage: $890
This homeowner would save more than $480 per month by extending the loan term.
The downside is that it will take longer to pay off the home. However, it can be well worth a refinance if it helps you keep your home during a financially tough time.
3. Use today’s rates to lower your payment
Mortgage rates are hitting historic lows and are not far off from the all-time lows seen in 2012.
Today’s rates offer a chance for struggling homeowners to reduce their payments, even if they are not employing one of the other strategies, namely converting a fixed-rate to an ARM or a short-term loan to a t30-year fixed.
For instance, if rates are near 3%, and some homeowners still have rates in the 4s or 5s, they could reduce their housing costs significantly.
The following is an example of potential savings.
- $250,000 mortgage at 4%: $955
- $250,000 mortgage at 3%: $840
Some households believe they can’t refinance due to the home’s value.
However, home prices have ben rising nationwide. As a result, many homeowners have gained enough equity to refinance — even if they made a small down payment.
Check with a lender to find out whether you’re refi-eligible.
4. FHA loans and VA loans may be eligible for streamline refinancing
Most refinance options require you to have adequate income, but there are exceptions.
The FHA streamline refinance is ideal for homeowners with an FHA loan currently, and want to reduce their payment.
The FHA streamline does not require income verification. You may be required to prove you are still working, but the income from that job need not be verified.
And, no appraisal is required. If the home has lost value, the lender can still approve your refinance.
Likewise, the VA streamline refinance does not need an appraisal or income verification. And, you don’t need to show your bank account balances.
These loans are available to just about any homeowner with a VA loan currently. VA rates are lower than conventional ones, so savings could be substantial. Check with any VA-approved lender even if you are unsure whether your current loan is VA-backed.
Lowering your mortgage payment when refinancing isn’t an option
There are other options for struggling households besides a traditional refinance. Government programs and lender work-outs can help too.
1. Loan modification may be an option
Loan modification helps homeowners lower their monthly mortgage payments, but without the income verification required by conventional mortgage refinancing. The total principal that you owe doesn’t change, nor does a loan modification replace your current mortgage.
Instead, lenders may adjust the terms of a loan by reducing the interest rate or extending the payoff period to make mortgage payments more manageable when you’re unable to refinance due of a loss of income or other financial setback.
In most cases, to qualify for a loan modification, borrowers must have missed at least three mortgage payments and be able to document their financial hardship.
Flex Modification is one such loan modification that helps homeowners with a Fannie Mae or Freddie Mac mortgage avoid foreclosure by lowering monthly payments by as much as 20%.
2. Rent out your home
The rental market is strong in many regions of the country due to tight housing inventory.
This option works well if you have another place to live for a short period, possibly at a relative’s or friend’s home.
You may even be able to charge more than you pay for your monthly mortgage payment. This would further assist you to make up for lost income or extra expenses.
If you don’t have somewhere to go, consider renting out a room or a furnished basement. You probably won’t make as much, but you may shore up your finances sufficiently to cover the mortgage.
Before you proceed, be sure your insurance agent says you have adequate coverage. Thoroughly vet anyone you rent to, and have renters cover or contribute to payments for water, heating, electrical, and trash pickup.
3. Consider selling
Selling your home may sound drastic, but it’s better to be proactive and sell if the market is strong. It’s better long-term on your finances and credit to sell, if you don’t believe you can make the payments.
With this scenario, you may also be able to move in with family. More multi-generational members are doing so. And they reap some nice benefits: sharing living expenses, and providing care for younger and elderly family members.
Is no-income verification refinancing really an option?
While common in the years leading up to the 2008 financial crisis, no-income verification loans have since become specialty products that are no longer widely available to homebuyers.
Some borrowers may still be eligible for a no-income verification mortgage, but it’s not a mortgage-refinancing solution for those who have lost income. Rather, self employed borrowers, retirees, 1099 workers or real estate investors with complex income who need a simplified underwriting process may qualify for a no-income verification refinance.
How does a no-income verification mortgage work?
Instead of providing lenders with tax returns, bank statements, paystubs, w-2 forms or other income documentation — no-income verification refinancing uses factors such as home equity, available assets and general cash flow to determine eligibility.
There are several types of no-income verification mortgages, or no doc loans, and each have their own set of guidelines.
Types of no-income verification loans
Stated income/ verified assets (SIVA)
A stated income/ verified asset loan allows borrowers to declare their monthly gross income on the loan application, but only requires verification by using bank statements, pay stubs, or other income documentation.
Stated Income/ Stated Assets (SISA)
Lenders use stated income/ stated asset loans to allow borrowers to state income without verification.
While SISA loans were common in the early 2000s, in the wake of the housing bubble burst in 2008, these types of home loans are often only used for investment properties.
No Income/ Verified Assets (NIVA)
A no-income/ verified assets loan can be used when a borrower has verifiable assets but no income documentation.
As an example, a retiree may not have verifiable proof of income, but their assets can be confirmed by mortgage lenders.
No Income/ No Assets (NINA)
Borrowers who are able to use a no income/ no asset loan are typically unable or unwilling to provide a lender or mortgage broker with proof of income, such as a home buyer whose assets are held in a foreign bank.
Instead, borrowers submit a declaration that authenticates their ability to afford mortgage payments.
Because they are higher risk, mortgage lenders often apply higher interest rates to NINA loans than they would to a prime mortgage loan.
Get a more affordable mortgage. Check today’s rates
Today’s refinance rates are low enough to help you reduce housing costs and get you a cheaper monthly mortgage payment.
Get a quote now for your refinance. Rates are near 2-year lows, but may not stay this low.