Refinance options when you lose income, experience a financial setback

Barbara Ballinger
The Mortgage Reports contributor

Tools for financially challenging times

Life is unpredictable.

Sometimes things turn out better than you could have imagined.

You’re a homeowner with a growing career and family. Everything is going right.

But life offers no guarantees, and unexpected challenges arrive.

Your company downsizes, a family member becomes ill, or you are faced with another situation in which finances become tight.

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?

Yes, this is one possible solution. Today’s mortgage rates are near all-time lows. Accommodative mortgage programs are designed to help struggling homeowners. And, other strategies can help you weather financially lean times, too.

With some planning, you can give yourself more time to get back to a more secure stage of life.

Verify your new rate (Oct 15th, 2021)

Be proactive about financial setbacks

Refinancing becomes very difficult once you miss a payment.

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 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. 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 to refinance. Talk to stores and other creditors. Some may let you delay payments without giving you an official late payment on your credit report.

Verify your new rate (Oct 15th, 2021)

Refinance strategies to reduce your payments

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 now are in the 3s, which could potentially cut many homeowners’ rates in half. How much money per month could refinancing into an ARM save?

Someone with a $250,000 mortgage at a 4.5% interest rate pays over $1,250 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 3.5% as of June 2019.

At this lower rate, the homeowner would cut their payment by $150 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.

Verify your new rate (Oct 15th, 2021)

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 fifteen 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 average rates per Freddie Mac.

  • 15-year fixed-rate mortgage: $1,695
  • 30-year fixed-rate mortgage: $1,128

This homeowner would save more than $550 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 two-year 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 thirty-year fixed.

For instance, if rates are near 4%, and some homeowners still have rates in the 5s or 6s, and they could reduce their housing costs significantly.

The following is an example of potential savings.

  • $250,000 mortgage at 6%: $1,500
  • $250,000 mortgage at 4%: $1,200

Some households believe they can’t refinance due to the home’s value.

But, the FMERR Program allows you to reduce your rate and payment, even if you owe more than your home is worth.

Check with a lender to see if Fannie Mae or Freddie Mac owns your loan. If one of them do, you are likely eligible for a refinance.

Verify your new rate (Oct 15th, 2021)

Refinancing after a reduction in income

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.

Verify your new rate (Oct 15th, 2021)

Specialty programs for struggling homeowners

There are other options for struggling households besides a traditional refinance. Government programs and lender work-outs can help too.

1. Flex Mod

The Flex Mod replaced the HAMP program in recent years.

The program seeks to reduce your payment by 20%, or bring your home payment below 40% of your income.

Typically, you have to report hardship as a homeowner. Yet, you can’t have incurred a 90-day late on your mortgage.

For more information on Flex Mod, see Fannie Mae’s website.

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.

What are today’s rates?

Today’s refinance rates are low enough to help you reduce housing costs and get into a more affordable mortgage.

Get a quote now for your refinance. Rates are near 2-year lows, but may not stay this low.

Verify your new rate (Oct 15th, 2021)