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Short Refinance FAQs

What is the difference between a Short Refinance and a Normal Refinance?

A Short Refinance is when the amount of principle that you owe to your lender is reduced, and forgiven by the lender and a new loan is qualified for under new terms based on the new value of your home. A normal refinance is when you have equity in the home and can qualify for any one of the several loan programs that the lenders may offer at that time.

What is a “Short Payoff”?

A Short Payoff is when your current lender(s) agree to a principal reduction in the amount they are owed by you.

What happens if my Lender does not approve the Short Refinance?

If you work with us and your lender doesn't approve a short refinance, we can negotiate better terms on your loan or help you sell as a short sale with a lease option to purchase your home (either way, you'll stay in your home!).

How is Home Mortgage Experts Compensated?

As always, there are zero upfront fees and we are only compensated if your loan closes. (with the exception of a loan modification negotiated by our professionals,there may be an upfront fee).

How do I learn more about this?

Below are some news articles regarding short refinances and information regarding IRS tax implications (forgiveness of mortgage debt).

Short-Refinances’ Gaining Popularity
By Jay Romano
Mr Mortgage's Personal Opinions/Research
May 21st, 2008

Mortgage modifications are hot right now. Most lenders are working with borrowers who have a desire to stay in their home and CAN AFFORD to make the payments.I have heard of some great deals out there, such as balances being cut in half.

Some lenders are being generous some are not. But, I would not suggest going after a modification on your own because typically you only get one shot at it, so if you do not have your ducks in a row and know what you are talking about, you could get yourself in trouble.

Your other option maybe the little-known ‘Short-Refinance’. This works in the same way as a Short Sale but the mortgage holder discounts the note when the borrower refinances.

Most do not even know this option exists.

Bernanke has been very vocal about lenders writing down principal balances, but many have been reluctant to do mortgage modifications. There is really not much difference between a mortgage modification and a ’short’- refinance when all is said and done. From what I am hearing this process is gaining acceptance and may just turn out to be the way ‘the big national principal balance roll-down’, that I have been predicting, will go down. But unlike many mortgage modifications, ’short-refis’ are typically reserved for borrowers who can qualify for a new loan other than the fact they owe more than the property is worth, because there has to be a new loan program for them to go into in order for the current mortgage holder to allow the discount.

Remember, as with mortgage modifications, short-refinances can take much longer than a traditional purchase or refinance transaction. This process can take two to three months to complete because of the negotiation process with the current mortgage holder in reducing the principal balance.

If the mortgage holder and the new lender are the same, then it may go quicker but then again, they also may rather just do a modification.

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Refinancing a Property whose value is down
By Jay Romano
The New York Times
March 8, 2008

“Q. I know that with a short sale, a lender accepts whatever results from the sale of a property and forgives the remainder of the debt, but what is a short refi?”

“A. Holden Lewis, a mortgage expert with Bankrate.com, said a short refi is a refinanced mortgage with forgiveness of some of the original debt.”

“For example, he said, if a home has lost value since it was purchased, and the borrower now can’t afford the payments (which is quite possible for people who have adjustable rate mortgages) instead of foreclosing on the property — or agreeing to a short sale — the lender could forgive some of the debt and refinance the loan closer to its current market value.”

“When President Bush signed the Mortgage Forgiveness Debt Relief Act last month, he made it clear that the law was intended to make it easier for homeowners to refinance with debt forgiveness
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Banks should accept mortgage principal cuts
By Barbara Liston
Reuters
March 4, 2008

“ORLANDO, Florida (Reuters) - Banks may have to swallow reductions in the principal of some troubled home loans to ward off greater losses that could result from outright default, Federal Reserve Chairman Ben Bernanke said on Tuesday.”

“Warning that mortgage delinquencies and foreclosures are likely to rise, with more declines in house prices, Bernanke called for active measures from both the public and private sectors to stabilize housing markets.”

"This situation calls for a vigorous response," Bernanke said in a speech to the Independent Community Bankers of America, referring to government and private-sector initiatives to slow the rate of home loan failures.”

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Short Refi’s Coming?
By Alan White
Consumer Law and Policy Blog
February 21, 2008

“A big stumbling block to renegotiating mortgages in danger of foreclosure is the reality that many homeowners now owe more than their home is worth. This situation is sometimes referred to as being "underwater." Servicers of securitized mortgages (prime and subprime) are often willing to write down the amount due on the mortgage if the homeowner is selling (and has a buyer.)

Servicers are much less willing to write down the principal loan amount to the home value to allow a homeowner to refinance with a cheaper or less risky mortgage that will permit them to save their home: a "short refi." The concept of writing loan balances down to market value is familiar in the commercial real estate sector, but seems for some reason more controversial for consumer and residential loans, despite the fact that in many cases a short refi will yield a better return for the investor than a foreclosure.”

“Buried in a story in today's Wall Street Journal is a report that some servicers may start getting strong federal agency encouragement to do short refis. John Reich, director of the Office of Thrift Supervision, regulator of federal savings banks (like WaMu) revealed that OTS is working on a short refi plan.
"Measures to reduce preventable foreclosures could help not only stressed borrowers but also their communities and, indeed, the broader economy," he said.”

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FDIC chief floats “Short Refi’s”
By Senior Reporter Holden Lewis
Mortgage Matters
January 21, 2008

“YOU READ IT HERE FIRST: Mortgage servicers should streamline a way to offer refinances that include debt forgiveness, the chairman of the Federal Deposit Insurance Corp. told the Senate today.”

“FDIC Chairman Sheila Bair told the Senate Banking Committee that 2009 will bring a wave of resets and recasts of so-called "nontraditional" mortgages -- interest-only and pay-option ARMs. These borrowers are going to suffer from astounding payment shock.” “Not only will the interest rates increase, but a lot of these borrowers are going to find that they owe tremendously more than their houses are worth -- and suddenly, they'll be forced to pay interest and principal.”

“The solution: Allow those borrowers to refinance those loans for less than the outstanding balances, with the difference forgiven.”
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Mortgage Workouts, Now Tax-Free for Many Homeowners; Claim Relief on Newly-Revised IRS Form

Updated with FAQs at bottom — Feb. 28, 2008

IR-2008-17, Feb. 12, 2008

WASHINGTON — Homeowners whose mortgage debt was partly or entirely forgiven during 2007 may be able to claim special tax relief by filling out newly-revised Form 982 and attaching it to their 2007 federal income tax return, according to the Internal Revenue Service.

Normally, debt forgiveness results in taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007, enacted Dec. 20, taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was less than $2 million. The limit is $1 million for a married person filing a separate return. Details are on Form 982 and its instructions, available now on this Web site.

“The new law contains important provisions for struggling homeowners,” said Acting IRS Commissioner Linda Stiff. “We urge people with mortgage problems to take full advantage of the valuable tax relief available.”

The late-December enactment means that reporting procedures for this law change were not incorporated into tax-preparation software or IRS forms. For that reason, people using tax software should check with their provider for updates that include the revised Form 982. Similarly, the IRS is now updating its systems and expects to begin accepting electronically-filed returns that include Form 982 by March 3. The paper Form 982 is now being accepted, but the IRS reminds affected taxpayers to consider filing electronically, which greatly reduces errors and speeds refunds.

The new law applies to debt forgiven in 2007, 2008 or 2009. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief. In most cases, eligible homeowners only need to fill out a few lines on Form 982 (specifically, lines 1e, 2 and 10b).

The debt must have been used to buy, build or substantially improve the taxpayer's principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.

Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new tax-relief provision. In some cases, however, other kinds of tax relief, based on insolvency, for example, may be available. See Form 982 for details.

Borrowers whose debt is reduced or eliminated receive a year-end statement (Form 1099-C) from their lender. For debt cancelled in 2007, the lender was required to provide this form to the borrower by Jan. 31, 2008. By law, this form must show the amount of debt forgiven and the fair market value of any property given up through foreclosure.

The IRS urges borrowers to check the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. Borrowers should pay particular attention to the amount of debt forgiven (

Box 2
) and the value listed for their home (
Box 7
).

FAQS

What is the Mortgage Forgiveness Debt Relief Act of 2007?
The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see News Release IR-2008-17). Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.

What does that mean?
Usually, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. The Mortgage Forgiveness Debt Relief Act of 2007 allows you to exclude certain cancelled debt on your principal residence from income.

Does the Mortgage Forgiveness Debt Relief Act of 2007 apply to all forgiven or cancelled debts?
No, the Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes.

What about refinanced homes?
Debt used to refinance your home qualifies for this exclusion, but only up to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified.

Does this provision apply for the 2007 tax year only?
It applies to qualified debt forgiven in 2007, 2008 or 2009.

If the forgiven debt is excluded from income, do I have to report it on my tax return?
Yes. The amount of debt forgiven must be reported on Form 982 and the Form 982 must be attached to your tax return.

Do I have to complete the entire Form 982?
Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Adjustment), is used for other purposes in addition to reporting the exclusion of forgiveness of qualified principal residence indebtedness. If you are using the form only to report the exclusion of forgiveness of qualified principal residence indebtedness as the result of foreclosure on your principal residence, you only need to complete lines 1e and 2. If you kept ownership of your home and modification of the terms of your mortgage resulted in the forgiveness of qualified principal residence indebtedness, complete lines 1e, 2, and 10b. Attach the Form 982 to your tax return.

Where can I get this form?
You can download the form at IRS.gov, or call 1-800-829-3676. If you call to order, please allow 7-10 days for delivery.

How do I know or find out how much was forgiven?
Your lender should send a Form 1099-C, Cancellation of Debt, by January 31, 2008. The amount of debt forgiven or cancelled will be shown in

box 2
. If this debt is all qualified principal residence indebtedness, the amount shown in
box 2
will generally be the amount that you enter on lines 2 and 10b, if applicable, on Form 982.

Can I exclude debt forgiven on my second home, credit card or car loans?
Not under this provision. Only cancelled debt used to buy, build or improve your principal residence or refinance debt incurred for those purposes qualifies for this exclusion.

If part of the forgiven debt doesn't qualify for exclusion from income under this provision, is it possible that it may qualify for exclusion under a different provision?
Yes. The forgiven debt may qualify under the "insolvency" exclusion. Normally, a taxpayer is not required to include forgiven debts in income to the extent that the taxpayer is insolvent. A taxpayer is insolvent when his or her total liabilities exceed his or her total assets. The forgiven debt may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm indebtedness or qualified real property business indebtedness. If you believe you qualify for any of these exceptions, see the instructions for Form 982.

Is there a limit on the amount of forgiven qualified principal residence indebtedness that can be excluded from income?
There is no dollar limit if the principal balance of the loan was less than $2 million ($1 million if married filing separately for the tax year) at the time the loan was forgiven. If the balance was greater, see the instructions to Form 982, page 4.

Is there anything else I need to know before filing?
Yes. Because the Mortgage Forgiveness Debt Relief Act of 2007 was passed so late in the year, the software systems used by tax preparers and at the Internal Revenue Service need to be updated to accept the revised Form 982. The IRS expects to be able to process the new Form 982 electronically on March 3, 2008.