How to refinance your home if it's underwater

By Tony Moton

Yahoo! Homes/Photo: Thinkstock - Find out which strategies can help you turn your upside-down mortgage right-side up.

Scuba divers and other submariners might be thrilled by the thought of being underwater. But homeowners? Not really.

Just ask Jim Martin, a senior loan originator with the Metro Advisor Group - a mortgage company based in Pittsburgh, Penn. Martin says homeowners who are "underwater" owe more money on their mortgage than their house is worth. This situation - also known as being "upside down" or having "negative equity" - can cause homeowners to panic about their financial well-being, he says.

But, here's some good news for those homeowners: The housing market is on the rebound. In fact, rising home prices led to 850,000 residential properties returning to a state of positive equity during the first quarter of 2013, according to a June 2013 study by CoreLogic, an organization that provides comprehensive data for the real estate market. 

While this is great news, there are still plenty of homeowners who aren't out of the water yet. CoreLogic's analysis also showed that 9.7 million - or 19.8 percent of all residential properties with a mortgage were still underwater.

Thankfully, mortgage professionals say there are a number of potential solutions - like government-backed refinance programs - available to homeowners seeking to rid themselves of negative equity. Here are some options to consider should you have an underwater mortgage.

Option #1: Refinance through HARP

If your mortgage is owned by Fannie Mae or Freddie Mac, the second incarnation of the Home Affordable Refinance Program (HARP) could widen your possibilities of qualifying for a refinance.

Here's how: HARP 2.0 has eliminated the maximum loan-to-value (LTV) ratio for HARP loans, reports the Federal Housing Finance Agency (FHFA). This means that homeowners who were previously denied from the program because their home's value was too low (relative to how much they owed on their mortgage) could now qualify.

And along with making it easier for homeowners to be eligible, HARP has also been extended until December 31, 2015. Originally, it was supposed to end in December 2013.

“More than two million homeowners have refinanced through HARP, proving it a useful tool for reducing risk,” said FHFA acting director, Edward J. DeMarco, in a press release announcing the deadline extension. “We are extending the program so more underwater borrowers can benefit from lower interest rates.”

Option #2: Consider an FHA Streamline Refinance

If you don't qualify for HARP, you still have options - one of which is the Federal Housing Authority's (FHA) "Streamline Refinance" program, which has looser qualifications than HARP.

In fact, with an FHA Streamline Refinance, employment verification, income verification, and credit score verification are all not required, according to the U.S. Department of Housing and Urban Development (HUD).

So, what exactly is required for a Streamline Refinance? According to HUD, these are basic requirements:

• The mortgage must be FHA insured
• The mortgage must not delinquent
• The refinance results in a lower monthly principal and interest payments or the conversion of an adjustable-rate mortgage (ARM) to a fixed-rate mortgage (FRM).
• 
  No cash may be taken out on mortgages refinanced through a Streamline Refinance

 

Option #3: Get the Veterans Affairs' Interest Rate Reduction Refinance Loan

Members of the armed forces might be trained to deal with adversity on land, at sea, and in the air, but being underwater as homeowners is an entirely different ballgame.

Luckily, the U.S. Department of Veterans Affairs' Interest Rate Reduction Refinance Loan (IRRRL) is a viable option that assists veterans who are underwater on their mortgage.

“It’s a very strong program, but you have to be a veteran currently in a VA (home loan),” Martin says.

If you fit both of those criteria, according to the VA's website, the IRRRL program is designed to lower interest rates by refinancing existing VA home loans. The possible end result for the homeowner is paying a more affordable house note.

"By obtaining a lower interest rate, your monthly mortgage payment should decrease," writes the VA's website.

The biggest advantages of the IRRRL is that it doesn’t require a home appraisal or credit underwriting, according to Martin. If your home has negative equity, this facet of the program could prove invaluable for homeowners who qualify.