One tool that lenders will sometimes use when a borrower begins to default on their mortgage payments is called a short refinance. Basically the mortgage lender will offer a short refinance to help minimize the total loss they will endure if a foreclosure on the property actually took place. Even though a short refinance can and will have some sort of affect on the borrowers credit score, the impact is much less dramatic then if the home went into foreclosure.
Even though the mortgage lender will lose some money on this, they will end up saving a lot of money and avoid the inconvenience of having to go through the entire foreclosure process. Depending on what state you are located and the foreclosure laws that apply to your area, your lender may not be able to collect on the proceeds from the foreclosure anywhere from six months to an entire year after the sale takes place. In addition to all the fees and the inconvenience involved with foreclosure lenders will also be required to pay legal fees in order for the sale to go through.
So because of all the hassle lenders will have to go through to proceed with a foreclosure they will sometimes look for a solution to help themselves and the borrower avoid this situation. A short refinance is a very effective way for a lender minimize loss on the property and at the same time maintain steady flow of revenue. Even though the total amount of the refinance will usually end up less than what is owed on the mortgage balance, the difference will usually be forgiven by the lender.
If a short refinance does go through the borrower will also greatly benefit from this event. With this the borrower will not be hit with a huge loss on their credit rating making it easier for them to finance in the future, and also obtain a decent interest rate on a credit card if they choose to do so. A short refinance will usually have an impact on the equity the borrower has built up, but this impact is still not nearly as dramatic as what foreclosure would cause. Therefore, if you complete a short refi you will still be in the same home you reside, but you will owe less on the mortgage.