Can I Refinance With Negative Equity?

October 1, 2009 4 Comments »

no equity refinance

Mortgage Q&A: “Can I refinance with negative equity?”

Nowadays, more and more homeowners are finding that their home isn’t worth what it once was.

In fact, many are discovering that their current mortgage balance now exceeds the value of their property, putting them in a position of negative equity, otherwise known as being upside down or the proud owner of an underwater mortgage.

Negative equity has been on the rise in the past few years as a result of falling home values and high loan-to-value (LTV) loans, you know, the ones where borrowers put next to nothing down.

Unfortunately, many of these same borrowers also elected to take out adjustable-rate mortgages, or even worse, option arms, with the latter allowing for negative amortization.

Ironically enough, the mortgage indexes tied to these adjustable-rate loans are now super low, meaning many resetting ARMS are actually lower than anticipated. But this is only temporary, and certainly doesn’t provide long-term security.

The fact of the matter is many homeowners, even those deeply underwater, want to take advantage of the record low fixed mortgage rates currently available, and who can blame them?

However, most mortgage lenders frown upon borrowers with little or no home equity; not to mention the fact that many banks lowered maximum LTV ratios in light of the mortgage crisis.

So, how can a borrower refinance if they have negative equity?  Well, the U.S. government saw what was happening and decided to step in and lend a hand.

HARP Allows Borrowers to Refinance with Negative Equity

Earlier this year, the Obama Administration created the so-called Home Affordable Refinance Program (HARP), which allows “underwater borrowers” (those with negative equity) to refinance in order to take advantage of the record low mortgage rates, thereby improving affordability and reducing foreclosures.

The program allows homeowners to refinance their mortgage up to a loan-to-value of 125%, meaning if your home is worth $100,000, the max loan amount you could receive under the program would be $125,000.

To qualify, you must be current on your mortgage payments, the home must be an owner-occupied 1-4 unit property, and your loan must be owned by Fannie Mae or Freddie Mac.

[How do I know if Fannie or Freddie own my mortgage?]

Update: You can now refinance with no maximum LTV ratio, meaning even the most underwater homeowner may be able to snag a lower mortgage rate. See the details of HARP Phase II.

If you meet the qualifications above, contact your mortgage lender or loan servicer right away to get the HARP process rolling before the low mortgage rates disappear.

If your loan isn’t owned by Fannie and Freddie, speak with your loan servicer and/or mortgage lender about special refinance programs for those in negative equity positions.  Many individual lenders have programs designed for underwater borrowers, so be sure you don’t miss out.

You may be able to qualify for a loan modification even if you owe more than your home is currently worth.

Negative Equity FHA Borrowers Are Also in Luck

If you happen to have an FHA loan, you may also be eligible for a refinance if you are in a negative equity position.

The FHA offers a streamline refinance option, which is available to existing FHA borrowers who are current (in good standing) on their loans.

There is no appraisal requirement, so essentially no LTV constraints and no appraisal fees!

Don’t confuse this program with the FHA Short Refinance program, which is only available to borrowers whose loan is NOT owned or guaranteed by the FHA, VA, USDA, or Fannie and Freddie.

Read more: Learn about a short refinance, which some lenders will allow if you’re short on home equity.


  1. Binh Nguyen October 6, 2016 at 4:41 pm - Reply

    I’m new to the whole mortgage industry and I hope this isn’t a stupid question. I’m confused as to what the benefit of refinancing an underwater mortgage. With the example above, if the home is only worth $100,000, why get a loan of $125,000? Doesn’t that mean you now have an even higher loan to pay off when your home is already worth so low?

    • Colin Robertson October 7, 2016 at 9:54 am - Reply


      Just because a property value dips for a moment in time doesn’t mean the homeowner can/should stop paying the mortgage. You would refinance to get a lower interest rate and the loan amount could be higher than the current value because it originally sold for more. Ideally over time the homeowner gets back above water once values bounce back and they have a lower payment thanks to the refi.

  2. J SOHN February 1, 2016 at 1:49 pm - Reply

    can you tell me if the federal government has a law regarding how much escrow a mtg. co must have in your acct? our boa loan was sold to nation star mtg last year and now even though nothing has changed (taxes/insurance) they have said they are required by law to have enough excess in the escrow acct to make two monthly payments and that we were short on that last year by $400 so they are taking an additional $63 a month for escrow. we weren’t short on paying taxes and insurance, they said we were short on what the feds say we have to have in there and we owe them that. the $63 a month comes to $756 a year! this is way more than double one monthly payment. can they do this? do the feds even tell them how much we must have? this fly by night mtg co services from the Philippines i read! please help me understand how they can do this. thank you!

    • Colin Robertson February 1, 2016 at 3:24 pm - Reply

      J Sohn,

      This is pretty common and has to do with rising taxes/insurance and perhaps an assessment that you needed more money set aside in your escrow account.

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