Can You Refinance Your Mortgage if Your Home Is for Sale?

By Gina Pogol
Mortgage Credit Problems Columnist

You bought a home. You chose an Option ARM, interest-only mortgage, or an adjustable rate mortgage with a very high margin (typical of subprime programs). You planned to clean up your credit and sell or refinance your property before the loan terms became unmanageable. The terms of your loan changed and the payments shot up.You did everything right, but can't sell your home in this market. But can you refinance?

Can't Sell. Can You Refinance?

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It depends. Your best bet, if you think it's going to take a long time to sell your property, is to refinance it before putting it on the market. Try to find a lender that allows you to pay a slightly higher rate in exchange for covering some or all of the refinance closing costs. There's no point in paying extra to buy yourself a lower rate if you only end up keeping the loan for a year or two.

Refinancing? Take that Stupid Sign Down

If your home is already listed for sale, you definitely can't continue to market the property while trying to refinance it. If it has been listed in a local MLS (Multiple Listing Service) you won't be able to hide the fact that the house was on the market. It will show up on your appraisal and you won't be allowed to refinance immediately.If you just had an informal arrangement with a real estate agent (often called a "pocket listing") you can just terminate it and go forward with the refinance. Be smart and remove the "For Sale" signs from your yard though. Appraisers or sometimes just the lender's employees have been known to notice and refinances have been derailed.

Times Are Changing

Lenders are recognizing that this is an unusual market and that people are having to change their home ownership goals. So, if you can document your situation--the reason you listed your home for sale, why you no longer wish to sell it, prove that you have canceled your listing with your real estate agent--you can probably find a lender to help you out. You might have to keep your property off the market for at least 6 months before your refinance goes through. You might have to accept a loan with a prepayment penalty. And if you are refinancing the home as a primary residence (which gets you the most favorable terms) you can't turn around and rent it out once the loan closes.

Refinance Rescue from FHA

What if your old loan trashed your credit and lenders won't allow you to refinance? Try FHA. The FHASecure program can help those with ARMs who were successfully paying their bills until a rate increase made it impossible to meet their obligations. If your good credit went bad because of an ARM reset, you may still be allowed to refinance into a fixed rate FHA mortgage. This could be a major help to those with subprime ARM loans, allowing them to get the payments under control.

Listing your property for sale used to make it automatically ineligible for a refinance. Not any more. Contact several lenders and find out what their policies are. Then take care of the required paperwork and make your best deal.

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