Owe more on your mortgage loan than your home is currently valued at? If so, you are not alone. Many borrowers are underwater on their mortgages, a situation that can be challenging to navigate and reverse.
That begs a question: Can you refinance your mortgage loan when you are underwater?
Fortunately, the answer is yes if you qualify for a special refinance program. Find out what it means to be underwater, if and when it’s possible to refinance an underwater loan, different refinance programs to consider, the steps involved with refinancing, and other options you can pursue if you cannot currently refinance.
What Being “Underwater” on a Mortgage Means
Being “underwater” on a mortgage simply means that you owe more on the home loan than your property is worth.
This can occur due to a decline in your property’s value, an increase in your mortgage debt, or a combination of both. Being underwater is a critical issue, as it hampers your financial flexibility and may limit options like selling the property or refinancing.
The best way to reverse an underwater status is to either increase your home’s value via making home improvements or by waiting until your local market improves on its own, or by decreasing the principal amount you owe by making larger payments.
Is it Possible to Refi When You Are Underwater?
Although it is more challenging to refinance your primary mortgage loan when you are underwater, the good news is that you can attempt to refinance if you qualify for special conventional or government-backed loan programs.
However, there are restrictions involved. For example, your current conventional mortgage must be backed by Fannie Mae or Freddie Mac, you must be current on your payments, and your loan must have originated after October 1, 2017.
Here are 5 popular options for refinancing your mortgage when you are underwater.
Option #1: FHA Streamline Refinance
If you want to refi your FHA loan, you can pursue an FHA streamline refinance with minimal red tape (here, “streamlined” means less documentation and underwriting is involved).
To qualify, you must be current on your mortgage payments, the refinance must result in a net tangible benefit to you in the form of a lower interest rate and/or improved loan term, and you can’t cash out more than $500 at closing. Other restrictions apply, too.
The benefits of an FHA streamline refi include potentially obtaining a lower interest rate and reducing monthly payments.
Option #2: USDA Streamlined Assist Refinance
Got a USDA home loan? Think about applying for a USDA streamlined assist refinance, which can lower your monthly mortgage payments by at least $50.
For most borrowers, no new appraisal, credit review, home inspection, or debt ratio calculation is required, although the USDA must verify that your mortgage was paid as agreed for 12 months prior to the refinance application.
Your income may not exceed the adjusted annual income limit for the county or metropolitan statistical area where your home is located. Other rules and stipulations apply.
Option #3: VA IRRRL Loan
The VA streamline refinance — better known as the VA Interest Rate Reduction Refinance Loan (IRRRL) — can lower your interest rate without requiring documentation, possessing a minimum credit score, or needing an appraisal. That means you can qualify even if you are underwater.
But you must currently have a VA mortgage loan, be an active duty military member, veteran, or surviving spouse, and certify that you currently live in or used to reside in the home covered by the loan.
Some streamlined refinance programs, like the VA IRRRL or USDA Streamlined Assist, may allow borrowers to refinance without requiring a new appraisal — even if they are underwater — as long as the refinance results in a tangible financial benefit, such as a lower monthly payment or more stable loan terms.
| Product | Rate | APR |
|---|---|---|
| 30-year Fixed Fha Refinance | 5.56% | 6.77% |
| 30-year Fixed Usda Refinance | 5.56% | 5.70% |
| 30-year Fixed Va Refinance | 5.68% | 5.82% |
How we source rates and rate trends
Conventional Options
In the past, homeowners with high loan-to-value (LTV) ratios who were current on their mortgage payments had access to special refinancing programs through Fannie Mae and Freddie Mac:
- Fannie Mae High LTV Refinance Option
- Freddie Mac Enhanced Relief Refinance Mortgage
These programs were designed to help underwater borrowers refinance their loans despite exceeding standard LTV limits. However, both programs were discontinued in 2021 and are no longer available.
While there are no equivalent conventional options currently in place, housing policy is subject to change. In the future, similar programs may be introduced to assist borrowers in a similar position. For now, your best bet may be to explore government-backed options or alternative strategies if you’re underwater on your mortgage.
Steps Involved With an Underwater Refinance
Eager to move forward with a refinance of your underwater mortgage, assuming you qualify? Here’s what you need to do:
- Examine your existing mortgage loan and property value. Calculate your current mortgage balance and evaluate the present value of your home to understand the extent to which you are underwater.
- Investigate available refi programs. Look closer at each of the refinance approaches listed above, and consult closely with a lending expert who can guide you through your best options.
- Gather required documentation. Prepare the necessary documents, such as income statements, tax returns, bank statements, and property appraisals to support your refinance application.
- Submit a refinance application. Complete the application process, being sure to furnish accurate information and required documentation that the lender needs.
- Await approval and closing. Allow the lender to review your application, perform necessary verifications, and make a decision. If approved, follow the lender’s instructions to close the loan, sign the necessary documents, and complete the refinancing process.
Alternative Options if You Cannot Refinance
Not eligible for any of the refi options listed above? Don’t panic. There are alternative strategies to consider that can help your underwater situation.
Pay Down Your Mortgage Balance
By making additional payments toward your mortgage principal, you can decrease your loan balance over time. This strategy will help you regain equity in your home. But it requires steady financial discipline and the flexibility to make extra payments.
Related: Is It Better to Refinance or Pay Extra?
Mortgage Modification
Contact your lender to request a modification of your loan terms. If they agree, you could lower your monthly payment and/or interest rate, making matters more affordable.
Qualification requirements often involve demonstrating financial hardship and providing documentation to support your request.
Related: Loan Modification vs. Refinance
Short Sale
If you need to sell your home but cannot cover your remaining mortgage balance and closing costs with the sale proceeds, a short sale may be an option. In a short sale, the lender agrees to accept less than the full payoff amount on the loan.
However, the forgiven portion of the mortgage debt may be treated as taxable income by the IRS, depending on your situation. That said, borrowers who complete a short sale on their primary residence may qualify for tax relief under existing IRS provisions. A short sale can also significantly damage your credit score and may delay your ability to qualify for a new mortgage.
Deed in Lieu of Foreclosure
This tactic involves voluntarily transferring your property to the lender to bypass foreclosure.
While a deed in lieu of foreclosure can help you avoid the lengthy foreclosure process, it still causes serious damage to your credit and may make it difficult to qualify for a new mortgage for several years.
Ready to Explore Your Refinance Options?
Whether you’re underwater or simply looking to improve your mortgage terms, Refi.com specializes in helping homeowners navigate their refinancing options. Our team can evaluate your situation and guide you toward the best solution for your financial goals. Start your refinance application today to see what options are available to you.
