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How to refinance when your home is listed for sale

With the ongoing housing crisis, it's an increasingly common scenario: family tries to sell house, family can't sell house, family decides to keep house. But what if the family would like to refinance the house that's still on the market?

Is that possible?

A home sale listing doesn't have to kill a refinance, but it can make it much harder. From the mortgage lender's perspective, you have some convincing to do.

Why a home sale listing can derail your refinance

When homeowners can't sell a primary residence, they often try to refinance and then rent them out while they themselves find another home. So when mortgage lenders see your refinance application and your plans to sell, they are leery that you'll do exactly that.

If mortgage lenders sell a mortgage on the secondary market and the mortgage goes into default or gets paid off in just a couple of months, they may be forced to buy it back.

Bottom line: If you're refinancing a home listed for sale, you need to show the mortgage lender you don't actually want to sell anymore.

Don't try flying in under the radar

Don't try refinancing your home as a primary residence if you are really going to keep marketing it.

If you are working with a Realtor who listed your home sale on a Multiple Listing Service (MLS), the refinance mortgage lender will find out.

If your selling efforts only involved sticking a "for sale by owner" sign on your front yard, by all means, toss the sign and proceed with your refinance. Similarly, if you worked with an agent who did not use the local MLS, you can probably cancel the listing agreement, lose the sign and refinance to your heart's content.

Mortgage lenders audit their files, and you could be charged with fraud if your home sells right after you refi or if you end up defaulting and it turns out you've turned it into a rental property.

Guidelines for Fannie, Freddie and FHA refinancing

Fannie Mae and Freddie Mac only require that you have your home off the market when you apply for your mortgage refinance. It can be off for one day and that's good enough for them.

However, your lender will probably care.

The Federal Housing Administration (FHA) takes no official position regarding homes listed for sale--so again, what the individual lender wants is far more important. Your FHA documents do require, however, that you sign off on your intention to live in the home as a primary residence for at least a year.

When you apply for a refinance, FHA underwriters are charged with making sure that you in fact intend to live in the home.

How to successfully refinance in this situation

Follow these steps to increase the chances that your refinance application will go through:

1. Cancel your listing. If your home is listed with an agent and on the MLS, you want to cancel your listing agreement, in writing. The letter to your agent should indicate that you wish to terminate your listing agreement, that you have decided not to sell your home and that you plan to continue living in it. Make multiple copies and get original signatures on all of them.

2. Write a letter to the lender. Draft a letter of intent stating that you have pulled your home off the market and that you plan to continue living in it as your primary residence. Some mortgage lenders may be more willing to refinance your mortgage if you accept a prepayment penalty with your new loan.

3. Talk to multiple lenders. Ask your mortgage lender how long the home needs to be off the MLS. Mortgage lenders vary a great deal in this requirement. Some just want it off the MLS for a day, but others may want to see your home off the market for six to 12 months. When shopping for your refinance, do more than compare current mortgage rates and fees; ask loan officers how a home listed for sale will be treated when refinancing.

With the right documentation and steps, you should find that refinancing is possible, even if your home was recently listed for sale.

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