The recession and housing downturn have created a financial crisis for many homeowners, but a foreclosure refinance may be an option for some.

As home prices have dropped, many homeowners assumed a refinance was not possible for them. But many lenders offer programs that allow a refinance, even for borrowers who owe more on their loan than their home is worth.

Foreclosure options

If you are having difficulty making your monthly payments and believe a foreclosure is in your future, you need to assess your overall financial picture and consider your options.

  • Sell your home. No one wants to lose their home to a foreclosure. But if you believe you are better off not owning your home or will find it impossible to make the mortgage payments, even if they are reduced, it may be better to consider putting your home on the market.
  • Try a short sale. If your home value is lower than your mortgage balance, you may have to negotiate a short sale with your lender.
  • Offer a deed in lieu of foreclosure. This option streamlines the foreclosure process.
  • Try a foreclosure refinance. If you prefer to keep your home, contact your lender immediately to discuss options for refinancing your mortgage. You may qualify for the Home Affordable Modification Program, or HAMP, a federal government program that gives struggling homeowners the opportunity for a loan modification or refinance. If not, you can still ask your lender for other options to make your payments more affordable.

Preparing for a refinance

Homeowners who are prepared for refinancing will have a better chance of obtaining an approval. Start by using a mortgage calculator to estimate your potential payments and develop a budget.

Next, prepare documentation of your income and assets. If you are requesting a modification with lower interest payments, a reduction of your principal or an extension of your loan repayment period, you may need to prepare a hardship letter explaining your current financial difficulties.

Trying for a foreclosure refinance? Start with a phone call to your lender, who can help you evaluate your options.