Our goal is to give you the tools and the confidence you need to improve your finances. While we do receive compensation from our partner lenders, whom we will always identify, all opinions are ours. Credible Operations, Inc. NMLS # 1681276, is referred to herein as “Credible”.
An underwater mortgage, sometimes referred to as a reverse mortgage, is a home loan with a principal balance greater than the value of the house. In other words, you owe the lender more than the value of your home. 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 can be difficult because you have negative equity. Most lenders want you to have some equity before refinancing, because if you don’t pay off your 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.
How to refinance an underwater mortgage
There are several ways to refinance an underwater mortgage:
FHA streamline refinancing
An FHA simplified refinance is a mortgage that comes with less paperwork and potentially no credit check. 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 Simplified Refinances, but we can help you if you are considering interest rate and term refinancing or cash refinancing. Checking rates with us is free, secure and has no effect on your credit score.
Will streamline refinancing
A simplified VA refinance – also known as an Interest Rate Reduced 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 streamline refinancing
The US Department of Agriculture also offers a streamlined program that removes some of the paperwork refinancing 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 Refinancing
To note: Fannie Mae has temporarily suspended this program. It can resume in the future with modified conditions.
This special refinancing program was designed for homeowners with low cap or underwater mortgages that closed between October 1, 2017 and June 30, 2021.
To be eligible, Fannie Mae must own your mortgage and your loan-to-value ratio (LTV) must be greater than 97%. You were also to benefit in some way from refinancing, such as lowering your interest rate.
Freddie Mac Enhanced Relief Refinance
To note: Freddie Mac has temporarily suspended this program. It can resume in the future with modified conditions.
Similar to Fannie Mae’s High LTV refinancing 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-cap mortgages. or submarines owned by Freddie Mac. .
Recheck the value of your home
Between 2020 and 2021, US homeowners saw their workable home equity increase by 40%, according to mortgage data company Black Knight.
As a result, the number of high LTV loans and subs has decreased. You may now be eligible for refinancing without realizing it, so consider taking an appraisal.
If You Can Refinance an Underwater Mortgage, Should You Do It?
Refinancing an underwater mortgage can be an option in some cases, but you should consider how long you plan to stay in your home. If you stay there for a few more years, you may decide to continue making regular monthly payments until the market moves in your favor.
Home values ââare increasing at an average rate of about 3.9% per year, according to Black Knight. If home values ââin your area tend to rise, your reverse mortgage could eventually recover 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:
Pay off the loan balance
The easiest solution, if you have extra wiggle room in your budget, is to pay more for your mortgage until you qualify for refinancing. It can help get you out of the water faster and give you enough equity to refinance.
Request forbearance under the CARES law
If you’ve had trouble making your mortgage payments due to the coronavirus pandemic, you may be able to take advantage of mortgage forbearance under the CARES Act and temporarily suspend your payments.
The 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 to request an initial forbearance.
Apply for 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 rebuild your principal more quickly.
Sell ââthe house and cover the difference
Another option is to put your house on the market, but you will need to figure out how much you can get for it. If it doesn’t cover the amount needed to pay off the mortgage, you’ll need to calculate the difference at closing.
Make a short sale
A short sale allows you to sell your home for less than what you owe on the mortgage. But there are a few hurdles to overcome.
Your lender will need to approve the short sale, which can affect your credit. In some states, you may have to pay the remaining loan balance, unless your lender agrees to waive it.
Accept 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 return, you avoid the foreclosure process and can be released from the remaining mortgage balance, depending on the laws of your state.
Your lender is under no obligation to agree to a deed in lieu of foreclosure, and they can refuse it for a number of reasons. For example, your lender may be able to get more money back by opting for a foreclosure instead.
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 house in an attempt to recoup their investment.
In addition to losing your home and the equity you’ve built up, you may have to pay the difference between the home’s selling price and the remaining mortgage balance. The foreclosure will also hurt your credit.
When does it make sense to refinance an underwater mortgage?
Many homeowners have refinanced in 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 let you refinance an underwater mortgage. If you have a government guaranteed loan (FHA, VA, or USDA), you might be lucky because downsizing programs make it easier 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 can delay refinancing until home values ââin your area increase.
Keep reading: When to refinance a mortgage: is it the right time?