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How to Refinance an Underwater Mortgage

Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, which we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to herein as “Credible”.

An underwater mortgage, sometimes known as a reverse mortgage, is a home loan where the principal balance is greater than the value of the home. In other words, you owe the lender more than your house is worth. This puts you at a disadvantage if you are looking to sell or refinance your home.

Here are your options if you are trying to refinance an underwater mortgage:

Can you refinance an underwater mortgage?

If your mortgage is underwater, refinancing may be difficult because you have negative equity. Most lenders want you to have some equity before you refinance because if you don’t pay off the mortgage, the lender has a better chance of selling the home without incurring a loss.

It is possible to refinance an underwater mortgage in some cases, but it will depend on the type of mortgage you have.

Learn more: mortgage refinance calculator

How to Refinance an Underwater Mortgage

There are several ways to refinance an underwater mortgage:

FHA streamlines refinancing

An FHA streamlined refinance is a mortgage that involves less paperwork and potentially no credit checks. It also doesn’t include a home appraisal, so you can refinance even if your mortgage is underwater.

You will need to have an existing FHA loan and meet a few other requirements to use this option.

Credible does not offer FHA streamlined refinances, but we can help you if you are considering a rate and term refinance or a cash-out refinance. Checking rates with us is free, secure and has no effect on your credit score.

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Will streamline refinancing

A VA streamlined refinance – also known as an interest rate reduction refinance loan (IRRRL) – generally requires fewer steps than a traditional refinance. One of the main benefits of an IRRRL is less paperwork without an assessment in most cases.

If your home loan is guaranteed by the Department of Veterans Affairs, this program may allow you to refinance an underwater mortgage.

USDA streamlines refinancing

The US Department of Agriculture also offers a streamlining program that eliminates some of the refinance paperwork on existing USDA loans. There is no appraisal in most cases, so you may be able to refinance an underwater mortgage.

Fannie Mae High LTV Refinance

To note: Fannie Mae has temporarily suspended this program. It may resume in the future with modified conditions.

This special refinance program was designed for homeowners with low principal or submarine mortgages that closed between October 1, 2017 and June 30, 2021.

To qualify, Fannie Mae must own your mortgage and your loan-to-value (LTV) ratio must be greater than 97%. You also had to benefit in some way from the refinance, for example by lowering your interest rate.

Freddie Mac Enhanced Relief Refinance

To note: Freddie Mac has temporarily suspended this program. It may resume in the future with modified conditions.

Similar to Fannie Mae’s High LTV Refinance Program, Freddie Mac’s Enhanced Relief Refinance Program was created for home loans closed between November 1, 2018 and June 30, 2021. It was available to homeowners with low mortgages. capital or submarines owned by Freddie Mac. .

Double-check the value of your home

Between 2020 and 2021, US homeowners saw their usable home equity grow by 40%, according to a mortgage data company Black Knight.

As a result, the number of high-RPV and sub-loans fell. You may now qualify for a refinance without realizing it, so consider getting an appraisal.

If you can refinance an underwater mortgage, should you?

Refinancing an underwater mortgage may be an option in some cases, but you need to consider how long you plan to stay in your home. If you stay there for a few more years, you can decide to keep making regular monthly payments until the market changes in your favor.

Home values ​​are increasing at an average rate of about 3.9% per year, according to Black Knight. If home values ​​in your area are trending up, your reverse mortgage could eventually straighten out on its own.

What to do if you can’t refinance an underwater mortgage

If you can’t refinance an underwater mortgage, you still have options:

Repay the loan balance

The easiest solution, if you have extra room in your budget, is to pay more for your mortgage until you qualify for refinancing. This can help you get out of the water faster and give you enough equity to refinance.

Point: Lenders may impose certain refinancing requirements, such as having a minimum amount of equity, which may affect how much you will need to repay.

Let’s say your home is worth $200,000, you owe $210,000 on your mortgage, and you need 5% equity to refinance. You will need to repay at least $20,000 before applying for a refinance loan.

If you save $300 per month through refinancing, it will take you 5.5 years to break even on the $20,000 spent paying off the mortgage.

Request forbearance under the CARES Act

If you’ve had trouble making your mortgage payments as a result of the coronavirus pandemic, you may be able to take advantage of mortgage forbearance under the CARES Act and temporarily suspend your payments.

Initial forbearance plans last about three to six months. You can request an extension if you need more time to get your finances in order. There is currently no deadline for requesting an initial forbearance.

Request a mortgage modification

A home loan modification is an agreement between you and your lender that permanently changes the terms of your home loan.

This is not a refinance, but your lender may agree to reduce your principal balance, which can help an underwater mortgage by allowing you to replenish your principal more quickly.

Sell ​​the house and cover the difference

Another option is to put your home on the market, but you’ll need to consider the price you can get for it. If that doesn’t cover the amount needed to pay off the mortgage, you’ll have to find the difference at closing.

Be sure to shop around and compare rates with multiple lenders if you decide to opt for a cash refinance. You can do this easily with Credible – and you’ll be able to see your pre-qualified rates in just three minutes.

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Make a short sale

A short sale allows you to sell your home for less than you owe on the mortgage. But there are obstacles to overcome.

Your lender will need to approve the short sale and it could affect your credit. In some states, you may be liable for the remaining loan balance unless your lender agrees to waive it.

Agree to a deed in lieu of foreclosure

A deed in lieu of foreclosure is an agreement between you and your lender whereby you transfer ownership of your home to your lender. In exchange, you avoid the foreclosure process and can be released from the remaining mortgage balance, depending on your state’s laws.

Your lender is under no obligation to accept a deed in lieu of foreclosure, and they may refuse it for a number of reasons. For example, your lender may be able to recover more money by opting for a foreclosure instead.

Good to know: A deed in lieu of foreclosure will have a negative impact on your credit score, but generally to a lesser degree than a foreclosure.

Let the house seize

When you are behind on mortgage payments, your lender may eventually take your home through the foreclosure process. The lender will then sell the home to try to recover their investment.

In addition to losing your home and the equity you’ve built up, you may have to pay the difference between the sale price of the home and the remaining mortgage balance. Foreclosure will also hurt your credit.

When does it make sense to refinance an underwater mortgage?

Many homeowners have refinanced over the past year or so to take advantage of historically low interest rates. If you have a high-rate mortgage and qualify for better terms, refinancing can help you save money and pay off the mortgage better.

Unfortunately, many lenders won’t allow you to refinance an underwater mortgage. If you have a government-backed loan (FHA, VA, or USDA), you might be in luck because the simplified programs make it easy to refinance an underwater mortgage.

If you have a conventional loan, you may need to pay off some of the loan balance before you can qualify for refinancing. Or, you could delay refinancing until home values ​​in your area increase.

Keep reading: When to refinance a mortgage: is it the right time?

About the Author

Kim Porter

Kim Porter is an expert in credit, mortgages, student loans and debt management. She has been featured in US News & World Report,, Bankrate, Credit Karma, and more.

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