A short refinance is designed for homeowners who owe more on their mortgage than their home’s current market value—a situation often called being “underwater” or having “negative equity”. Unlike foreclosure or short sales, a short refinance allows homeowners to stay in their homes while restructuring their debt.
How Does a Short Refinance Work?
The process starts when a homeowner contacts their current lender to discuss refinancing options and demonstrates financial hardship. The lender typically requires the borrower to be current on mortgage payments and will order an appraisal to determine the home’s market value. If the lender agrees, they forgive a portion of the outstanding mortgage debt and provide a new loan for the reduced amount.
This lowers monthly payments and aligns the loan balance more closely with the home’s value, helping the homeowner rebuild equity over time.
Who Qualifies for a Short Refinance?
Eligibility criteria vary by lender but generally include:
- Having a loan-to-value (LTV) ratio over 100%, meaning the mortgage balance exceeds the home’s market value.
- Being current on mortgage payments.
- Showing verifiable financial hardship like job loss, medical expenses, or other emergencies.
- Having a loan held by a lender willing to offer short refinance programs.
- Maintaining a reasonable credit score to qualify for a new loan.
Short Refinance vs. Short Sale
While both options address underwater mortgages, a short refinance lets you keep your home by adjusting your loan, whereas a short sale requires selling your home for less than the mortgage balance, resulting in moving out. A short refinance is generally less damaging to your credit than a short sale or foreclosure.
For more details on related options, see our articles on Short Sale and Underwater Mortgage.
Tax Implications of a Short Refinance
Debt forgiven in a short refinance may be considered taxable income by the IRS under Cancellation of Debt (COD) rules. However, the Mortgage Forgiveness Debt Relief Act, extended through 2025, allows some exclusions for forgiven mortgage debt on a primary residence. Because tax laws frequently change, consult a tax professional to understand potential tax liabilities.
Additional Resources
- Consult IRS Publication 4681 for details on cancellation of debt tax implications (IRS.gov)
- For mortgage assistance options, visit the Consumer Financial Protection Bureau’s guide on handling mortgage difficulties (consumerfinance.gov)
A short refinance can offer a practical solution to regain financial stability for underwater homeowners willing to work with their lender.
