Refinancing Underwater Mortgages

How to Refinance When Property Value Has Dropped and Your Mortgage is Underwater or Upside Down

 

Property values have stagnated or dropped significantly nationwide. If you bought your home or investment property at the height of the recent boom, you’ve probably seen your property values fall so low — that they’re now below your mortgage loan balance.

Even though your mortgage is considered “upside down” or “underwater,” you still have options and opportunities for refinancing. Much depends on how well you’ve managed to pay your mortgage loan payments up to now.

If your mortgage is currently underwater, here are five programs that may help you take advantage of current interest rates to get lower mortgage loan rates and monthly payments.

FHA Short Refinance

The FHA short refinance program is probably the most beneficial for homeowners with upside down mortgages, but it is also proving to be the most difficult.

Even though there have been success stories, the truth is that many homeowners have been unable to take advantage of this program, because it requires your current mortgage lender to absorb the loss.

The refinance loan is basically the standard 97.5% LTV mortgage refinance loan offered by the Federal Housing Administration. This FHA loan requires sufficient income to qualify and that you are current on your mortgage.

Therein lies the problem: not too many lenders have been willing to take a major haircut on a loan — especially on a mortgage loan that is current.

But that may be changing, as more and more lenders begin to realize that it’s better to take a small loss (that happens to be tax deductible) rather than take an even bigger loss if the property goes into foreclosure. For many homeowners who’ve successfully arranged an FHA short refinance loan, that has been the most successful argument. Some have even taken to suggesting that they may be forced to walk away from the loan.

Before you take the drastic step of an intentional or strategic foreclosure, however, it’s advisable to take the time to consider all available options for lowering your payments — and saving your home.

Note there are additional restrictions for this loan program:

  • Available only on owner-occupied primary residences
  • You qualify for the standard FHA refinance loan
  • You must NOT be past due on your mortgage payments
  • You don’t have a felony conviction during the last ten years
  • Your mortgage is not owned or guaranteed by Fannie Mae, Freddie Mac, USDA, VA or FHA.

That last one is probably the biggest problem with this loan, after the lender cooperation, for many homeowners. But for most homeowners with subprime mortgage loans, that should not be a problem.

For more information, go directly to MakeHomeAffordable.gov and speak to a counselor.

HARP

For homeowners whose mortgage loans are guaranteed or owned by Fannie Mae or Freddie Mac, the Home Affordable Refinance Program (HARP) offers the best opportunity for refinancing an underwater mortgage.

The HARP program works directly with the loan servicer, rather than the lender. Many of the major mortgage loan servicers have signed on to participate in the program. Plus, if your current servicer does not participate, you can contact other mortgage lenders who are participating in the HARP option.

Not all upside-down mortgage borrowers with Fannie Mae or Freddie Mac loans will qualify for the HARP option, however. The following are the basic conditions of HARP:

  • Your current loan cannot be guaranteed or owned by VA, FHA or USDA loans
  • Your current loan MUST be owned or guaranteed by the Federal National Mortgage Corporation (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac).
  • Your mortgage loan must not exceed 125% of your property’s appraised value.
  • You are current on your mortgage loan payments.
  • You must not have had made any payments more than 30 days late during the past 12 months.
  • You have the income to make the new payments.
  • The refinance will actually improve the long-term affordability of your mortgage loan.

So how do you know if your mortgage loan is owned by Fannie Mae or Freddie Mac? You can go directly to their websites at www.FannieMae.com and www.FreddieMac.com. Both sites allow you to look up your loan to determine your current mortgage loan’s ownership status.

HAMP

With the Home Affordable Modification Program (HAMP), it doesn’t matter if your mortgage is underwater or not.  As long as you have stable income and are at risk of falling into foreclosure, HAMP is designed to help you survive the crisis by modifying your existing loan.

Most of the top mortgage loan providers and servicers in the country are participating in the program. The goal of HAMP is lower your mortgage payments so that it is affordable, usually by bringing total mortgage payments down to under 31% of the borrower’s gross monthly income.

It accomplishes this by applying these modifications (in this order):

  1. Lower the interest rate. First, the lender will reduce the interest rates to as low as 2% per year.
  2. Extend the loan term. Secondly, the lender will modify the loan’s term to 40 years.
  3. Forbear a portion of the loan balance. Finally, the lender can issue a forbearance that takes a portion of the loan amount out of the equation… until the end of the loan. That forbearance amount will not accrue any interest. However, it still must be paid in order for the loan to be completely settled.

The HAMP option is available for both conforming (Fannie Mae or Freddie Mac) and non-conventional (FHA or VA) loans. In both cases, it’s okay if you’re currently delinquent on your loan or are in the process of foreclosure. Here are the basic eligibility requirements:

  • The property must be your primary residence (no second homes or investment properties).
  • The mortgage payment (including taxes and insurance) currently exceeds 31% of your gross (pre-deduction) monthly income.
  • You have sufficient income to qualify for the modified payments.
  • Your mortgage loan was originated before January 2009.
  • You have not been convicted of a felony in the last 10 years.

For more information, check with your loan servicer, if your mortgage loan is owned or guaranteed by Fannie Mae, Freddie Mac or FHA.

PRA

The Principal Reduction Alternative (PRA) is a program offered by HAMP-participating lenders and offers alternatives for many homeowners who cannot qualify for the HARP or HAMP options.

The eligibility requirements are similar to the HAMP option, except that it is for mortgage loans that are NOT owned or guaranteed by Fannie Mae or Freddie Mac. The main difference is that the PRA tries to help homeowners avoid foreclosure by reducing the loan’s principal balance.

Reverse Mortgage Loan

There are two basic requirements to qualify for the reverse mortgage loan:

  • The property must have decent equity.
  • The primary borrower must at least 62 years old and living in the property.

If your property does have equity but you aren’t old enough to qualify — but your parents or an older relative is living with you — you may still have an opportunity to take advantage of the reverse mortgage loan to save your home.

Some homeowners have been able to take advantage of this route by simply adding their parents or relative to the title of the property as co-owners. Before you try this, however, make sure to consult a professional.

 

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