As a homeowner, you may find yourself with a negative home equity mortgage if the original value of your home is currently worth less than the rest of your outstanding mortgage loan balance. This can happen when people buy homes just before the housing bubble bursts or, say, the economy goes into recession.
While you can simply keep paying your mortgage while they wait for the market to improve, you may have the opportunity to refinance and improve your mortgage.
One option, the Government-backed Home Financial Refinance (HARP) program, has been extended to December 31, 2018.
Negative Mortgage: What are my options?
Many homeowners with negative equity want to refinance, but their home, along with seemingly others, is worth less than it used to be. You may have approached several banks to refinance your home, but they said your loan-to-value (LTV) ratio was too high. In other words, your home mortgage loan is too much or actually exceeds your home’s current appraised value. Fortunately, you still have a few options.
It is possible to refinance a negative or “underwater” mortgage, although this is not necessarily easy. You have two choices:
- Try refinancing with one of the government homeowner assistance programs.
- Bring cash to close, which is not possible for most homeowners.
As a result of the housing crisis, the government has created several programs for homeowners facing difficult times.
These programs allow you to refinance even if you have negative equity or a very high LTV ratio. In most cases, you need to be current on your mortgage. Starting with a down payment can disqualify you from some program loans.
Which refinancing program should I use? It depends on how you got the mortgage loan, or more specifically, it depends on who currently owns your loan.
Borrowers may conclude that their loan is with Fannie Mae or Freddie Mac. This is possible even if you have never heard of these organizations, so the HARP program is the only option to refinance these loans.
If your mortgage is not backed by Fannie Mae or Freddie Mac, you can explore various other refinancing programs available for low or no-equity refinancing, such as FHA Streamlined or VA Streamlined loan refinancing programs. In many cases, these programs do not have an LTV requirement and do not require a new assessment, so the credit is based on the previous value of your home, which can make all the difference.
Alternative: Mortgage payment
There is another way to refinance with negative equity, which is to pay cash to reduce your loan value, closer to the current value of your home. You have reduced the amount you owe or make a large payment on your loan or if you pay cash on closing when you refinance.
Chances are that it prevented you from getting a refinance from a traditional lender. If you have a negative equity loan, you are borrowing more than the home is worth, and most lenders do not want to take that risk.
If you are in charge of a loan, the lender will not be able to repay it completely, even if they sell your home.
As a result, many lenders only suggest refinancing if you pay off your loan balance to create a more acceptable loan-to-value ratio, or wait until the market value of your home returns, improving the loan-to-value ratio.
Unfortunately, this approach requires that you have access to a lump sum of money. If you are unable to write a big check, government refinancing programs may be your only option. The HARP program invites homeowners to reapply, even if they were dropped before it was worth taking that extra step.
If you have taken full advantage of your credit and still cannot refinance, you may still be able to improve your situation. Ask your lender if you can modify the loan, or if they have other suggestions for you.
Most lenders would rather work with borrowers to make scheduled payments on a regular basis than borrowing required or abandoning their payments.
Ask yourself to change the terms of your loan to see if your lender has any other solutions to help you stay current with your mortgage.