Negative equity is not something any homeowner wants to think about, but it is reality for millions of homeowners around the country. When you owe more than your home is currently worth, you are in this unfortunate situation. This puts you in a worse situation than someone with a high LTV – you have the highest LTV possible and most lenders will not let you refinance. Are there any lenders who will let refinance? It depends on your exact situation, but there are definitely ways to get it done.
Fannie Mae and Freddie Mac Loans
If you have a loan owned by Fannie Mae or Freddie Mac and you are not behind on your mortgage payments, you can still take advantage of HARP®. The Home Affordable Refinance Program® helps those homeowners who benefit from refinancing into a lower interest rate but do not have equity in their home. This program is available until September 2017, so there is still time to figure out your options and get yourself a loan which enhances your equity position. Your best bet is to start with your current lender to see if they participate in the program. If not, you can use alternative lenders, but make sure to shop around to ensure you get the best deal for this government program.
If you currently hold an FHA loan and are underwater, you are in luck. If your sole purpose of refinancing is to lower your interest rate, you may qualify for the FHA Streamline Refinance. Why is this program so exciting? Because you do not have to secure a new appraisal, the lender can use all of the qualifying factors you used on your original FHA loan for your refinance. The only thing you have to verify is your loan payment history. As long as you made your last 12 mortgage payments on time, or if you have a late payment, it is not more than one 30-day late payment, then you could qualify for this program. This means you can refinance even if you have negative equity. The FHA Streamline program gives you the chance to lower your payment, which makes being stuck in an underwater home easier to handle.
Similar to the FHA Streamline program, the VA Streamline program offers the same type of program. The reason for your refinance must be to lower your interest rate and/or save money every month. The VA cares about your monthly disposable income, so if you are able to secure a lower interest rate and payment, you can increase your disposable income. This program also does not require an appraisal or any other qualifying documents with the exception of proof of your timely mortgage payments.
Pay Your Loan Down to Eliminate Negative Equity
Another option when you have negative equity is to pay your loan down. This is not the easiest solution for most borrowers, but it is worth looking into. First, you have to know how far underwater you are with your home. If it is a feasible amount which you could either pay down at the closing (paying the difference between the allowed LTV and the outstanding balance) or pay off in large increments, you could take this route, enabling you to refinance down the road. This option is not for everyone, but it can give you something to consider as you determine how to get out of the negative equity situation.
Wait Until Your Home Appreciates
The final solution to dealing with negative equity is to wait until your home appreciates and your loan balance decreases. This is a twofold solution and one which you can influence slightly. Going along with the above solution of paying your mortgage balance down, you can continue to make extra payments to the principal of your loan while you wait for the home to appreciate. Eventually, most areas will bounce back from their housing crisis values; it just takes longer in some areas over others. If you decide to wait, you can do your part by decreasing the principal balance on your loan as much as possible.
Dealing with negative equity is not the most pleasant situation, but there are ways around it. Do not just assume your only option is to walk away from the home or eat the loss. You have options; you just have to get creative with your choices. You can start with HARP® to see if you qualify and if it would save you money. If you do not qualify and you do not have a government-backed loan, such as an FHA or VA loan, you can still do your part to pay your loan down and gain equity back. It may take some time, but eventually you will get out of the underwater status and start making a return on one of the largest investments in your life again.