No one likes to think about the possibility that their finances may take a turn for the worse, but life-changing events such as redundancy, illness and even market crashes can harm the ability of home-owners to keep up with their mortgage repayments.


If financial hardship falls upon you and you can no longer afford to keep your home, there are three options that you can consider; refinancing, short sale or foreclosure.



What Is Refinancing?

When you refinance a mortgage, you are paying off the remaining loan amount and replacing it with a new loan (hopefully with better terms). Of the three options listed above, refinancing is the least damaging to your credit report. People choose to refinance for a variety of reasons, but the main reasons are to secure a better interest rate or release equity from their home if it has appreciated in value.


When considering whether to refinance or not, it is essential to look at the bigger financial picture of your circumstances.It is also worth noting that both ​Fannie Mae​ and ​Freddie Mac provide refinance opportunities to homeowners with existing mortgages.


If you can secure a better interest rate and lower your monthly repayments to an amount that you can afford, this would be the best option to avoid the turmoil of a short sale or foreclosure.




The Benefits of Refinancing;

1. The homeowner may be able to secure a better interest rate and lower their monthly repayments
2. Refinancing will not affect the ability of the homeowner to obtain future loans.
3. It results in less negative long term impacts on the homeowner in comparison to a short-sale or foreclosure.



The Disadvantages of Refinancing;

1. It may not be possible to secure a better interest rate
2. The new interest rate may not be enough to make the loan payments affordable


However, what if you are unable to secure an affordable refinancing option? That is when you will have to consider a short sale or foreclosure.




What Is A Short Sale?

A short sale is a possible solution when the homeowner can no longer keep up mortgage repayments, but owes more than what the home is worth. A short sale is much less damaging to your credit than a foreclosure, and if it matters to you, has less social stigma attached. The lender must agree to the short-sale taking place, as they are losing money, and typically requests documentation proving financial hardship on the borrowers part.



The Benefits Of A Short Sale;

1. Causes less damage to credit in comparison to a foreclosure 2. You can purchase another home in as little as two years
3. Future loans typically do not require disclosure of short-sales



The Disadvantages Of A Short Sale;

1. The lender must agree to allow the short sale
2. It will impact the homeowners credit score negatively


If the lender does not agree to a short sale, the final option would be to let the home to go into foreclosure.



What Does It Mean To Foreclose?

To foreclose means that the homeowner has defaulted on their mortgage payments and the lender has seized control of the property. Typically a homeowner will only foreclose if all other options have been exhausted, as the process can be distressing and has lasting implications. Different states have varying foreclosure procedures, and the ​U.S. Department of Housing and Urban Development has a guide to each states foreclosure process​.



The Benefits of a Foreclosure;

1. The homeowner can leave the property and discontinue the mortgage repayments

2. The solution is immediate



The Disadvantages of a Foreclosure;

1. The debtor’s credit score will be profoundly impacted
2. It typically takes seven years after a foreclosure to purchase a new home
3. It is required to disclose any previous foreclosed properties in future loan applications


If a homeowner can no longer keep up with their mortgage repayments, they should seek legal and tax advice before deciding how to proceed.