Mortgage Q&A: “Can I refinance with negative equity?”
Nowadays, more and more homeowners are finding that their home isn’t worth what it once was.
In fact, many are discovering that their current mortgage balance now exceeds the value of their property, putting them in a position of negative equity. otherwise known as being upside down or the proud owner of an underwater mortgage .
Negative equity has been on the rise in the past few years as a result of falling home values and high loan-to-value (LTV) loans, you know, the ones where borrowers put next to nothing down.
Unfortunately, many of these same borrowers also elected to take out adjustable-rate mortgages. or even worse, option arms. with the latter allowing for negative amortization .
Ironically enough, the mortgage indexes tied to these adjustable-rate loans are now super low, meaning many resetting ARMS are actually lower than anticipated. But this is only temporary, and certainly doesn’t provide long-term security.
The fact of the matter is many homeowners, even those deeply underwater, want to take advantage of the record low fixed mortgage rates currently available, and who can blame them?
However, most mortgage lenders frown upon borrowers with little or no home equity ; not to mention the fact that many banks lowered maximum LTV ratios in light of the mortgage crisis .
So, how can a borrower refinance if they have negative equity? Well, the U.S. government saw what was happening and decided to step in and lend a hand.
HARP Allows Borrowers to Refinance with Negative Equity
Earlier this year, the Obama Administration created the so-called Home Affordable Refinance Program (HARP), which allows “underwater borrowers” (those with negative equity) to refinance in order to take advantage of the record low mortgage rates, thereby improving affordability and reducing foreclosures .
The program allows
homeowners to refinance their mortgage up to a loan-to-value of 125%, meaning if your home is worth $100,000, the max loan amount you could receive under the program would be $125,000.
To qualify, you must be current on your mortgage payments. the home must be an owner-occupied 1-4 unit property, and your loan must be owned by Fannie Mae or Freddie Mac.
Update: You can now refinance with no maximum LTV ratio. meaning even the most underwater homeowner may be able to snag a lower mortgage rate. See the details of HARP Phase II .
If you meet the qualifications above, contact your mortgage lender or loan servicer right away to get the HARP process rolling before the low mortgage rates disappear.
If your loan isn’t owned by Fannie and Freddie, speak with your loan servicer and/or mortgage lender about special refinance programs for those in negative equity positions. Many individual lenders have programs designed for underwater borrowers, so be sure you don’t miss out.
You may be able to qualify for a loan modification even if you owe more than your home is currently worth.
Negative Equity FHA Borrowers Are Also in Luck
If you happen to have an FHA loan. you may also be eligible for a refinance if you are in a negative equity position.
The FHA offers a streamline refinance option. which is available to existing FHA borrowers who are current (in good standing) on their loans.
There is no appraisal requirement, so essentially no LTV constraints and no appraisal fees!
Don’t confuse this program with the FHA Short Refinance program. which is only available to borrowers whose loan is NOT owned or guaranteed by the FHA, VA, USDA, or Fannie and Freddie.
Read more: Learn about a short refinance. which some lenders will allow if you’re short on home equity.