Underwater Mortgage

Falling home prices, predatory lending, adjustable rate mortgages (ARM) - there are many factors that contribute to homeowners winding up with underwater mortgages. An underwater home mortgage is when your mortgage balance exceeds the value of the property, and it’s one of the most unenviable positions a borrower can find themselves in. No matter what your situation is, you do have a few options for refinancing an underwater mortgage - but depending on your parameters, there may be a good, better or worse avenue for you.

Home Affordable Refinance Program (HARP)

In the wake of the housing crisis, the government strengthened its programs to assist those with problem mortgages. One of the programs that the federal government runs is called the Home Affordable Refinance Program, or HARP. HARP lets qualified borrowers refinance their underwater mortgages in an effort to save your credit and save your home. In some cases, HARP can help you reduce your monthly mortgage payments by up to $400, which is just enough for homeowners need to get their debt under control.

In order to qualify for the federal home Affordable Refinance Program, your mortgage must be owned by Fannie Mae or Freddie Mac. You won’t likely know this off the top of your head, since this occurs after you originate your loan and your lender sells your mortgage on the secondary market as part of mortgage backed securities. To check to see if your mortgage is held by Fannie Mae or Freddie Mac, visit the HARP website to find the the Fannie Mae loan look up site and the Freddie Mac loan look up tool.

Also, if you have any delinquent payments, you cannot qualify for HARP.

If you are current on your loan and your underwater mortgage is owned by Freddie Mac or Fannie Mae, the government will evaluate your eligibility based on a few other factors. Typically, HARP accepts underwater mortgages that have outstanding amounts between 105 percent and 125 percent of the value of the home. They’ll also look at your credit history, the structure of the underwater mortgage and the lender’s own guidelines.

Home Affordable Modification Program (HAMP)

Another program available to underwater borrowers whose loans are held by Fannie Mae and Freddie Mac is HAMP, or the Home Affordable Modification Program. Loan modification is different from refinancing, as it does not pay off your previous loan and give you a new one. Instead, it renegotiates the terms in order to make the loan more manageable. HAMP is for those who are underwater on their mortgages, can demonstrate financial hardship and are in imminent danger of default. The government also offers incentives to help you modify your loans. Underwater mortgage modifications may temporarily reduce your payments for up to 60 months, though afterwards you may have to repay any deferred payments or interest.

Short Sale

If you cannot modify or refinance your underwater mortgage, your only option may be a short sale. A short sale is an arrangement where the lender agrees to withhold foreclosure, provided that you sell the house and turn the proceeds over to them. Depending on the terms of your negotiation, a short sale may also waive the outstanding balance, though sometimes the borrower remains liable for the amount on the underwater mortgage that isn’t covered by the sale of the home. The benefit to the borrower is that it lets them keep their credit rating intact, while the lender benefits by avoiding the costly and complex process of foreclosure. Still, it is often a lose-lose situation, as the borrower loses their home and the lender loses money. But as an alternative to foreclosure, a short sale is often preferable.

For more information on loan modification, underwater mortgage refinancing and other hardship options, contact your lender and ask them what programs you qualify for.