If you are faced with a home that is "underwater" -- you owe more on the mortgage than the house is worth -- there might still be help for you. Many Americans in this situation have been able to find help through a variety of home loan programs. But to qualify for this type of refinance, you'll need to meet certain underwriting criteria. You also might be required to adjust both your first and second mortgages.
FHA Streamline Refinance
If your current second mortgage is insured by the Federal Housing Authority, you might qualify for the agency's streamline program. A streamline refinance allows for no-equity loans because the process does not require a new appraisal on the property. But to qualify, your second mortgage must already be insured by the FHA, and you must not be delinquent on your mortgage payments. And the loan must lower your interest rate and payment or bring you out of an adjustable-rate second mortgage.
Refi Plus Loan
If your second mortgage is currently serviced by Fannie Mae or Freddie Mac, you could qualify for a no-equity refinance under the "Refi Plus" program. This option is supervised by the Home Affordable Refinance Program. In general, if your total loan amount exceeds 100 percent but is less than 125 percent of your house's value, you could qualify for this type of refinance. If you have excellent credit your chances of success are better. But even people with credit scores of just over 620 can qualify.
FHA Short Refinance
A rarer option is the FHA short refinance. This type of mortgage refinance is more difficult because it requires you to negotiate with your current lender to reduce your total mortgage balance (on your first or second mortgage) by 10 percent. This is for loans that didn't involve Freddie Mac or Fannie Mae. If you can arrange this, the FHA will guarantee a refinance for a new loan that doesn't exceed 97.5 percent of your home's value. It's also possible to apply for a short refinance with a private lender. The idea is the same: You now owe more on your mortgage than your house is worth. You and your lender work out an arrangement whereby the mortgage amount is reduced (usually to an amount equal to your home's value) in a refinance. Lenders are reluctant to provide these, and most cases of short refinance in the private sector have been the result of lawsuits.
Although there are several options for a second mortgage (or full mortgage) refinance, it's important to carefully gauge and assess them before acting. Going with a government-sponsored refinance might be the most prudent option, but it's also possible to find an alternative, non-government mortgage broker willing to take a chance on a no-equity second mortgage refinance. However, this might come with exorbitant fees, so fully review mortgage paperwork before closing.
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