The lender may be forced to foreclose on the home when a borrower cannot pay their mortgage.
As we know the mortgage is a loan that is secured by the collateral of a borrower’s property, the borrower is obliged to pay back the debt with a predetermined set of payments.
As mortgage, is one of the most common debt instruments, it is used by individuals and businesses to make large real estate purchases without paying the entire value of the purchase up front.
Over the number of years, the borrower repays the loan, along with interest, till the entire amount is paid off and they own the property free and clear.
If a borrower is unable to make payments on their mortgage, the loan goes into default.
Then the bank has a few options of which foreclosure is the most widely known option by the lenders, it means the lender takes control of the property, dislodges the homeowner, and sells the home.
However, foreclosure is a long and expensive legal process that a lender might want to avoid because they may not receive any payments for up to a year after beginning the foreclosure process and they will also lose out on fees associated with the procedure.
Some lenders may offer a borrower who is at risk of foreclosure the solution of a short refinance.
A borrower too may ask for this option of short refinance. These are advantageous for the borrowers – A short refinance allows a borrower to keep the home and reduces the amount owed on the property.
The downside of this being because they’re not paying the full amount of the original mortgage the borrower’s credit score will take a hit.