How to refinance an underwater mortgage?

Refinancing a mortgage in which the property value is lower than the balance of your mortgage can be an extremely tricky thing to pull off. Ideal candidates for lender restructuring established some solid home equity. If this figure is under 20%, your options for straightforward refinancing directly with the lender are very slim.

There are, however, alternative options for borrowers who are less fortunate. One is the Home Affordable Refinance Program (HARP), which is intended to help borrowers refinance loans which are up to 125% of the value of the property. There are, however, several qualifications one must meet to be eligible: you must have at least a one year track record of on-time payments, meet a minimum credit score requirement and you must not be facing a foreclosure. Additionally, the loan has to be owned by a federal-affiliated mortgage agency such as Freddie Mac or Fannie Mae.

There is a second, related, option called Home Affordable Modification Program (HAMP). It is designed to assist borrowers who are in financial straits too dire for qualification with HARP. Like with HARP, your mortgage must be owned by a government-affiliated lender to qualify. Unlike HAMP, the other primary qualification is to demonstrate that your finances are in such a shape that you are in immediate danger of defaulting on your loan. HAMP is not strictly refinancing in the usual sense but rather an alteration of the terms of your loan which may reduce your payments long enough to re-establish your finances, after which you may then have the option to refinance with HARP or even with the lender itself. Ultimately, final approval for HAMP restructuring is up to the lender, but it is worth pursuing in any case because lenders would almost always prefer to avoid the expensive and fretful process of default and foreclosure.

When you owe more on your mortgage than your home is currently worth, you have a couple of refinancing options - either through your mortgage lender or a government-backed refinancing program.

First, talk to your mortgage lender. Many lenders would rather refinance an underwater mortgage than risk a homeowner going into foreclosure. Before talking to your lender, gather your loan documents, copies of recent payments and recent paystubs. When you talk to your lender, explain your personal financial situation, especially if you are struggling to make the monthly mortgage payments. If your lender is willing to refinance your mortgage, you may need to provide proof of your income, and/or proof of a financial hardship. You will also have to pay a mortgage loan origination fee, which varies depending on the specific details of your refinance and how much you owe on the loan.

Your second option is to refinance through a government-backed homeowner program - the Home Affordable Refinance Program. Through HARP you can refinance your underwater Fannie Mae or Freddie Mac mortgage and lower your payments, providing you meet certain criteria. For example, you must be current on your mortgage payments and have a loan to value ratio greater than 80 percent.

There is also a government-backed program for FHA loans, known as FHA Short Refinance.  While your lender will have to approve your loan for this program, it will reduce your first mortgage to 97.75 percent or less of your home’s value. To qualify for FHA short refinance, you must be current on your mortgage payments and have above a 500 credit score.

You can find refinancing information specific to your own situation by contacting your mortgage lender or visiting the Making Home Affordable website.