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Refinancing underwater home loans

Once the bubble burst in the US housing market, many homeowners found that they were living in a home that wasn’t worth as much as their current mortgage. While this situation is not new, it has recently reached epidemic proportions. In some cases, cash-strapped homeowners are choosing to allow their mortgage company to foreclose or they’re simply walking away from their homes before that process can start. However, the current underwater mortgage refinance rules mean that many homeowners may be able to take advantage of refinancing an underwater loan.

How to Refinance Underwater Loans

Traditional underwater loan refinancing is hard to find during the best of economic times. However, many banks have recently tightened their lending practices for even the best customers making it even harder to find a refinancing loan. Now, most conventional mortgages only cover 80% of the value of the home for either a first mortgage or a refinance. Regardless of the homeowner’s credit rating, this requirement automatically eliminates most underwater home loan refinance plans. Of course, the late payments and low credit ratings that many underwater borrowers also have to contend with make it even harder to refinance underwater loans.


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Government Loan Refinance

The federal government has implemented a package of special program to help homeowners refinance their underwater home loans. While these programs started with the economic stimulus plan, March 2012’s revised Home Affordable Refinance Program, commonly known as the HARP 2.0 program, goes well beyond just helping homeowners with refinancing underwater loans when the mortgage balance is between 105% and 125% of the properties current value.

Refinance Underwater Home Loan Requirements

If a homeowner is interested in refinancing an underwater loan using the HARP program, the mortgage must be in good standing. Any late payments in the previous twelve months will automatically disqualify the applicant. The loan must be owned by either of the primary government-sponsored mortgage agencies, Fannie Mae or Freddie Mac. Many homeowners may not know if their property is owned by one of these agencies, but their lender can provide the information. Credit scores and lender rules will also apply. Homeowners can streamline this underwater home loan refinance program by using their existing lender, or they can choose a completely different financial institution.

In addition to traditional Fannie and Freddie mortgages, the government has also modified the rules that apply to refinancing FHA loans, VA loans and USDA loans on properties on rural areas in selected states. All three loans offer the opportunity to do a streamlined refinance without requiring homeowners to get their homes reappraised. This effectively eliminates the 125 percent upper limit on loan to value ratios that the original HARP and FHA Streamline programs had. In addition, while all of the special government programs require you to have at least 6 months of current payment, and others require 12 current months, they have very relaxed credit qualification options. Some do not even require you to verify your employment or provide a credit report. Investors are not left without options, either, as some of these loan programs can be used to refinance investment properties that were once owner-occupied.

Mortgage Refinance and Modification for Hardships

Homeowners interested in refinancing an underwater loan who don’t qualify for the HARP program may be able to take advantage of the Home Affordable Modification Program, also known as HAMP. The loan must be owned by the same government agencies or by another lender that qualifies for the program. HAMP is backed by the US government, but it is not an underwater loan refinance program. Instead, HAMP is a loan modification program that permanently changes the terms of a home mortgage. Under HAMP, you can have your interest rate lowered, have missed payments added on to the end of your loan or, in some cases, have a portion of your principal reduced. While getting approved for HAMP modifications has proven to be challenging, if you can qualify you stand to save thousands of dollars over the remaining life of your mortgage.


As long as you have been making your mortgage payments and do not have a jumbo loan, refinancing your underwater home mortgage is easier than it has ever been. Furthermore, with the low rates available in the market, completing a refinance has the potential to let you lock in a historically low mortgage loan rate for decades to come. Talk to a good lender or mortgage broker today to start exploring your options and get on the path to achieving these savings.


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