How to Refinance an Underwater Mortgage

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Last month we had an article here about having an underwater mortgage and what could be done in that case. From all the options, one was to refinance the mortgage. Let’s see now what underwater mortgage refinance options we can find and you’ll be able to decide which works better in your case.

Home Affordable Refinance Program (HARP)

If the value of your home declined and you cannot get a traditional refinancing, you might be eligible for a HARP refinance, but only if you are NOT behind on your mortgage payments (any delinquent payment in the past 12 months will disqualify you from the program). Here are some of the eligibility conditions to qualify for HARP:

  • The mortgage must be owned or guaranteed by Freddie Mac or Fannie Mae.
  • The mortgage must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009.
  • The mortgage cannot have been refinanced under HARP previously unless it is a Fannie Mae loan that was refinanced under HARP from March-May, 2009.
  • The current loan-to-value (LTV) ratio must be greater than 80%.
  • The borrower must be current on the mortgage at the time of the refinance, with a good payment history in the past 12 months.

Refinancing an underwater mortgage through HARP can save you $300-$400/each month on your mortgage payment, so it’s worth looking into.

FHA Refinance for Borrowers with Negative Equity (FHA Short Refinance)

This is another program dedicated to homeowners who are NOT behind on their mortgage payments. If you do have an underwater mortgage and was still able to keep up with the payments, you might be eligible for FHA Short Refinance. If your lender agrees to participate in this refinance option, they’ll be able to reduce the amount you own to no more than 97.75% of your home’s current value.

You may be eligible for FHA Short Refinance if you meet the following criteria:

  • Your mortgage is not owned or guaranteed by FHA, VA or USDA.
  • You owe more than your home is worth.
  • You are current on your mortgage payments.
  • You occupy the house as your primary residence.
  • You are eligible for the new loan under standard FHA underwriting requirements.
  • Your total debt does not exceed 50 percent of your monthly gross income.
  • You must not have been convicted within the last 10 years of felony larceny, theft, fraud, forgery, money laundering or tax evasion in connection with a mortgage or real estate transaction.

Home Affordable Modification Program (HAMP)

If you have trouble paying your mortgage and even had missed payments, you might qualify for a HAMP refinance. Here are the conditions to qualify:

  • Because of a financial hardship, you are struggling to make your mortgage payments.
  • You are delinquent or in danger of falling behind on your mortgage.
  • You obtained your mortgage on or before January 1, 2009.
  • Your property has not been condemned.
  • You owe up to $729,750 on your primary residence or one-to-four unit rental property (loan limits are higher for two- to four-unit properties).
  • You have not been convicted within the last 10 years of a crime in connection with a mortgage or real estate transaction.

Principal Reduction Alternative (PRA)

This is another program geared towards homeowners who are having an underwater mortgage. PRA was created to entice mortgage investors and service providers to reduce the amount you owe for your home. Here are the main eligibility conditions:

  • Your mortgage is not owned or guaranteed by Fannie Mae or Freddie Mac.
  • You owe more than your home is worth.
  • You occupy the house as your primary residence.
  • You obtained your mortgage on or before January 1, 2009.
  • Your mortgage payment is more than 31 percent of your gross (pre-tax) monthly income.
  • You owe up to $729,750 on your 1st mortgage.
  • You have a financial hardship and are either delinquent or in danger of falling behind.
  • You have sufficient, documented income to support the modified payment.
  • You must not have been convicted within the last 10 years of felony larceny, theft, fraud or forgery, money laundering or tax evasion, in connection with a mortgage or real estate transaction.

Do you know other underwater mortgage refinance programs? Which one do you feel is better for your situation? Have you used any option? 

3 COMMENTS

  1. We are still paying some pretty hefty installments for our mortgage and it’s a huge effort, for both me and my wife, but we are extra-lucky because her parents are helping us out and that means a lot! If it wasn’t for my in-laws, we would have had to look into one of these refinancing an underwater mortgage options you mentioned. We still have some years left, but hopefully we’ll never have to wonder if we qualify for any of them!

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