Refinancing strategies for financially challenging times
When you’re facing unexpected financial challenges, could a mortgage refinance loosen up your monthly budget?
Sometimes it can. And if refinancing won’t help — or if you’ve already missed too many payments to get a refi — modifying your current loan could still save some money.
With some planning, you can give yourself leeway to get back to a more secure stage of life.
In this article (Skip to...)
- First steps
- Refinance programs
- Other ways to save
- No-income refinance
- Types of no-income loans
- Check your options
First things to do when you’ve lost income
When you have already missed mortgage payments, refinancing the loan will be more difficult.
Most lenders and mortgage lending programs want to see a clean payment history for six to 12 months before they approve a refinance.
So if you’re facing hard times, or if you foresee them on the horizon, be proactive.
As soon as you know you won’t be able to make a mortgage payment, contact your loan servicer (the company to which you make payments). Explain your financial situation. Provide proof to back your claim.
For instance, if you’re out of work due to an injury or illness, “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.
Your lender does not want to foreclose
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.”
Still, unless you’re getting a Streamline Refinance, lenders will have to put your application through the qualifying process — just like they did when you got your current mortgage loan.
Qualifying for a refinance when you’ve lost income
The refinancing lender will need to appraise your home to see if your loan meets loan-to-value (LTV) limits. It will also check your debt-to-income ratio and credit history.
So keep your credit score as high as possible by making 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 most types of mortgage refinances.
Talk to your other creditors, too. 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’ll likely have more options for reducing your mortgage payments through a refinance.
These options are best for those who still earn income but struggle with a different type of financial hardship such as out-of-control medical bills. The reason is that you will probably have to share your current income with 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 mortgage for an ARM
You may be able to switch from a fixed-rate loan to an adjustable-rate mortgage (ARM) with a lower rate.
Introductory ARM rates are typically much lower than fixed mortgage rates, and this can help homeowners save big, at least for a while.
How much money per month could refinancing into an ARM save? Let’s take a look at one example.
On May 19, 2022, the average 30-year fixed rate was 5.25% according to Freddie Mac. The average 5/1 ARM rate, on the other hand, was just 4.08 percent.
Someone with a $300,000 mortgage at a 5.25% fixed interest rate pays over $1,650 per month in principal and interest. This figure does not include property taxes or homeowner’s insurance.
By contrast, the same mortgage at a 4.08% adjustable interest rate costs just $1,450 per month for principal and interest. That’s a savings of $200 per month or $2,400 per year.
However, an ARM loan is not without risk.
Usually, the low intro rate on an ARM is fixed for only three to seven years. Then the rate adjusts based on current market rates. That means your interest rate and payments could increase later on. So if you plan to keep the loan long-term and don’t anticipate being able to afford a potentially higher payment in the future, this might not be the best option.
In addition, you might have to qualify for an ARM based on its “fully-indexed rate” — meaning the highest your rate could possibly go after adjustments — rather than the low intro rate.
But, for the right person, this type of loan could be a way to temporarily reduce high housing costs.
2. Refinance into a longer-term loan
Both 15- and 30-year mortgage terms have their advantages: 15-year loans require less interest, but 30-year loans have far lower payments.
If you already have a shorter-term loan — such as a 10-, 15-, or 20-year mortgage — refinancing into a 30-year term could reduce your monthly payments significantly.
The principal and interest payment on a loan amount of $250,000 at 5% interest varies widely based on the loan’s term:
- 15-year fixed-rate mortgage: $1,980
- 30-year fixed-rate mortgage: $1,340
This homeowner could save more than $630 per month by extending the loan term.
The downside is that it will take more time — and more interest — to pay off the home if you stick to the schedule for the life of the loan. However, you may not mind the extra cost if the longer term keeps you in your home during a financially tough time.
3. Check your eligibility for a Streamline Refinance
Most refinance options require you to document adequate income, but there are exceptions.
The FHA Streamline Refinance is ideal for homeowners who already have an FHA loan and want to reduce their payment by extending their loan term.
The FHA Streamline is a low documentation loan, so it does not always 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 home appraisal will be required, either. If the home has lost value, the lender can still approve your refinance.
USDA- and VA-guaranteed loans also offer similar Streamline Refinance programs.
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 who currently has a VA loan. VA rates are lower than conventional loan rates, so savings could be substantial. Check with any VA-approved lender even if you are unsure whether your current loan is VA-backed.
What if refinancing won’t lower your payment?
As mortgage interest rates increase, lowering your monthly payment by refinancing will be more difficult. Plus, a refi charges closing costs that must be paid up front or added to the loan balance.
Fortunately, homeowners have other options besides a traditional refinance. Government programs and lender work-arounds can help, too.
1. Loan modification
Loan modification helps homeowners lower their monthly mortgage payments, but without the income verification required by conventional mortgage refinancing.
The total principal you owe won’t change. And a loan modification won’t replace your loan like a refinance would.
Instead, lenders may adjust the terms of a loan by reducing the interest rate or extending the payoff period, making the payments more manageable when you’re unable to refinance due to a loss of income or another 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 home loan modification that helps homeowners with a Fannie Mae or Freddie Mac mortgage avoid foreclosure by lowering monthly payments by as much as 20 percent. And your home doesn’t have to be your primary residence to use the Flex Modification program.
If you think you may be a candidate for loan modification, talk to your mortgage servicer. That’s the company to which you make your monthly payments.
2. Rent out your home
The rental market is strong in many regions of the country due to tight housing inventory.
Renting your home works well if you have another place to live — such as a relative or a friend’s home — for a short period.
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 else to live, 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
If you don’t expect you’ll recover and return to making regular payments, selling the home may be the right move.
Nobody wants to cash out a real estate investment too soon. But it’s better than losing the investment — which includes your original down payment, closing costs, mortgage payments, and other associated costs such as mortgage insurance premiums.
Selling your home may sound drastic, but it’s better to be proactive and sell if the market is strong.
With this scenario, you may also be able to move in with extended 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 a no-income verification refinance an option?
While common in the years leading up to the 2008 financial crisis, no-income verification loans — sometimes known as non-QM loans — have since become specialty products. They’re no longer widely available to homebuyers.
Even if they were widely available, non-QM loans are risky for lenders, so they require higher mortgage rates for borrowers. High rates make saving money with a refi a lot less likely.
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.
How does a no-income mortgage work?
Also known as a no doc mortgage or a stated income loan, a no-income verification refinance is a loan program that does not require mortgage lenders to verify a borrower’s income through traditional channels like tax returns or W-2s.
Instead of providing lenders with tax returns, bank statements, pay stubs, W-2 forms, or other income documentation, these loans use 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
No-income-verification mortgages are considered non-qualified (non-QM) loans and rates are significantly higher than for standard mortgage loan programs.
Stated income/ verified assets (SIVA)
A stated income / verified asset loan allows borrowers to declare their monthly gross income on the loan application, but requires verification only 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.
SISA loans were common in the early 2000s. But after the 2008 housing bubble burst, these loans became limited mostly to 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 help with your mortgage payment
Whether or not you qualify for a lower rate, refinancing can provide financial relief by extending your loan repayment term. This, in turn, lowers your monthly payments — although it could lead to paying more interest in the long run.
If you’re going through financial hardship, talk to a lender about your refinance options and other potential avenues for mortgage relief.
