How to Refinance a Mortgage When the House Is Appraised for Less Than What Is Owed

A home appraisal doesn't always bring good news.
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An underwater mortgage is one in which your home is valued at an amount less than what you currently owe on your loan. While this situation isn’t uncommon in a low housing market, it can be difficult to refinance your home when it appraises for less than you owe. Because the amount of equity you have in your home is used to qualify you for a refinance loan, you may need to rely on non-traditional refinancing options.

Step 1

Contact your lender directly if you are having difficulty keeping up with your loan payments. Explain that your home currently appraises for less than what you owe. Talk to your lender about your present financial difficulties and how you would benefit from refinancing your home.

Step 2

Ask your lender for information on principal reduction programs. Some lenders offer programs in which they forgive part of the principal balance on a mortgage. This gives homeowners the opportunity to refinance their mortgage at a lower interest rate and/or for a longer repayment term. The lender benefits by keeping the mortgage rather than having it go into foreclosure.

Step 3

Talk to your lender about a loan modification program if you don’t qualify for a conventional refinance loan. If you are eligible, the lender can lower your interest rate and/or stretch out the term of your loan. This allows you to stay in your home and avoid foreclosure, especially if you don’t have enough equity in your home to refinance your current mortgage.

Step 4

Look into an FHA Streamline Refinance Loan if the Federal Housing Administration insures your mortgage loan. You must be current on your mortgage, having paid all payments on time over the last year. Another requirement is that you must have owned your home for six months or more. You will also need to obtain your new mortgage from an FHA lender.

Step 5

Learn more about the Making Home Affordable Program enacted by the Obama administration (see Resources). Fannie Mae or Freddie Mac must guarantee you mortgage loan for you to qualify for this program. You must be making your mortgage payments on time in order to apply. The program allows you to borrow up to 125 percent of your home value, which can help to offset negative equity. Suze Orman points out that the low interest rate is only good for five years. After that, the rate will gradually increase to a permanent, fixed-rate mortgage loan. The Home Affordable Modification Program has been extended through June of 2011.

Step 6

Find out if you are eligible for the government’s Homeowner’s HOPE program (see Resources). The program allows you to refinance your mortgage by applying for an FHA-insured loan. You must have good credit and meet other FHA lending requirements. If you enter into the program, you will agree to equity sharing, which means that you must share any equity your home gains later with FHA. The program is scheduled to remain in effect until September 2011.

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