Your ability to refinance your primary residence depends on the ratio between the amount you owe and the value of your home. If you've paid down your mortgage and owe less than the assessed value of your home, the equity you've built can help you qualify for a refinance even if your home dropped in value after you bought it. When declining value means you owe more than your home's current worth, your refinancing options dwindle, but special programs may help you qualify.
The Woes of Negative Equity
You build positive equity in a home when you pay down your mortgage to the point at which your home value exceeds the outstanding balance on your loan. If your mortgage and your valuation match, you have no equity. When the debt exceeds the home value, you're upside down in negative equity. This inverted situation can stem from more than one cause. Slumping property values in an area caught in a bursting bubble of inflated prices can yield a depressed home value. An adjustable-rate mortgage with interest-only payments during an initial payback period also can impact your loan-to-value picture. Negative equity can disqualify you from many refinancing options, though there are some options available.
Home Affordable Refinance Program
The Making Home Affordable, or MHA, program provides refinancing options for people who find themselves in negative-equity territory. One of them -- the Home Affordable Refinance Program, or HARP -- serves upside-down homeowners with up-to-date payments on mortgages that Freddie Mac or Fannie Mae either have owned or guaranteed since May 31, 2009 or earlier. You'll need a loan-to-value ratio above 80 percent and a mortgage servicer that participates in the program.
FHA Short Refinance
If you are not behind on your mortgage payments and owe more than your home is worth, you may qualify for an FHA Short Refinance as long as the current mortgage on your primary residence doesn't carry an FHA, VA or USDA guarantee. This program is designed to help homeowners refinance into more a affordable and stable FHA-insured mortgage. According to the MHA website, "if your current lender agrees to participate in this refinance, they will be required to reduce the amount you owe on your first mortgage to no more than 97.75 percent of your home's current value." You must meet FHA underwriting requirements and carry debt no greater than half the monthly gross of your take-home pay.
Principal Reduction Alternative
If you've fallen behind on your payments, the Principal Reduction Alternative can help you lower mortgage debt to match your home's current value -- provided you don't have a Fannie Mae or Freddie Mac loan, your mortgage dates to January 1, 2009 or earlier and equals more than 31 percent of your monthly gross income. This program serves homeowners with $729,750 or less in first-mortgage debt.
You can modify an existing FHA loan to lower your principal and interest payments through a process known as streamlining, typically with no appraisal requirements and sometimes without out-of-pocket refinancing costs. If the mortgage on your primary residence dates back more than six months and you're current on your payments, you may qualify for a new loan through this program. To avoid paying closing costs, you must agree to a higher interest rate that covers the lender's outlay on transaction fees.
The U.S. Department of Veterans Affairs offers a program similar to the FHA's streamlining process, including the need for a history of on-time payments. A VA Interest Rate Reduction Refinance Loan avoids appraisals and credit underwriting, can tick up interest rates enough to build closing costs into the loan, and reuses the VA entitlement you used to obtain your original mortgage. The home you refinance may no longer be your primary residence, but you must have lived in it once upon a time. Although the program carries a funding fee, the VA provides exemptions for veterans with service-connected disabilities, and the surviving spouses of veterans who died from such disabilities or while in service.
- Realtor.com: When You Owe More on Your Home Than It's Worth
- Bankrate: Pros and Cons of Refinance Appraisals
- MakingHomeAffordable.gov: Home Affordable Refinance Program (HARP)
- MakingHomeAffordable.gov: FHA Refinance for Borrowers with Negative Equity (FHA Short Refinance)
- MakingHomeAffordable.gov: Treasury/FHA Second Lien Program (FHA2LP)
- MakingHomeAffordable.gov: Principal Reduction Alternative (PRA)
- FHA.com: Should I Consider an FHA Refinance Loan?
- U.S. Department of Housing and Urban Development: Streamline Your FHA Mortgage
- U.S. Department of Veterans Affairs: Home Loans: Interest Rate Reduction Refinance Loan
- U.S. Department of Housing and Urban Development: FHA Launches Short Refi Opportunity for Underwater Homeowners
- The Washington Post: How to Pay a Lower Rate Without Refinancing
- The New York Times: Hope and Frustration in New U.S. Effort to Help Homeowners
- U.S. Department of Housing and Urban Development: HUD Handbook 4155.1.6.C. Section C. Streamline Refinances
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