Refinancing Options When Upside Down in Mortgage

Reader Question: Are there options for refinancing (besides a short refi) when home value is less than current mortgage, and lender is not currently in default?

This is a fluid issue right now, with new developments taking place often. The situation you have described is referred to as being upside down or “underwater” with your mortgage loan — meaning that you owe more than the home is worth in the current economy.

This is a problem for many homeowners in the U.S. right now, and in many cases there are few options to be had. I just heard on the news yesterday that something like 12 million homeowners are upside down in their mortgage loans right now. Thus far, the government “bailout” has done a lot for financial firms, but very little for consumers.

The FHA’s so-called Hope for Homeowners program is supposed to help at-risk homeowners (likely candidates for foreclosure) refinance into more affordable 30-year fixed mortgages. But what people don’t realize is that you still have to apply through a private lender … and if you’re upside down in your current mortgage loan you can expect to be turned away.

Here’s some input I gathered from around the web:

“Millions of Americans are facing the same problem, In fact almost two out 10 who bought their homes in the last two years are already upside down … But even though they may not qualify for refinancing, economist Diane Swonk of Mesirow Financial, urges homeowners to hang on.” -CBS News

“Because they have little or no equity, such homeowners can’t refinance. If they can’t refinance, they have to ask the banks to modify their loans.If that doesn’t work, they have to sell their homes at a loss or let the banks foreclose on them.” -Washington Post

“If, however, you’re one of the millions of homeowners who are upside down … you won’t be able to refinance, Walters says.” - USA Today

“Within a year, Moody’s Analytics predicts, a whopping 30 percent of all U.S. mortgage holders will owe more on their homes than they are worth.” -Chicago Tribune

“Offer a deed in lieu of foreclosure. If you can’t sell the house for what you owe, but you’re not deeply “upside down” on your mortgage, this may be an option.” -MSN Money

Filed under: Refinance Questions