Being underwater on your mortgage is a sticky situation to be in. It becomes a more pressing concern if you are struggling with your mortgage repayment. Against this backdrop, here are some things you can do to mitigate your underwater mortgage situation.
Refinance will not end your underwater situation overnight but it does make your mortgage more manageable by (i) lowering your rate, (ii) switching to a more stable mortgage product, or (iii) changing the loan term.
It’s a standard for refinances to have at least 20% equity in your home to refinance. But not specialized programs like the Home Affordable Refinance Program® that have been made for struggling homeowners with underwater mortgages.
HARP® and its Successors
To qualify for a HARP®, your loan must be owned by Fannie Mae or Freddie Mac. It must also be current, meaning you’ve been making payments toward your mortgage for at least a year before you refinance.
There is no loan-to-value ratio ceiling under HARP®, which makes it perfect for underwater homeowners with Fannie- or Freddie-backed mortgages. Some homeowners were able to refinance with an LTV of 125% or higher.
HARP® is expiring by end of September this year but almost 195,000 borrowers could still benefit from it. A HARP® refinance could save these borrowers $2,400 a year.
After the HARP®’s expiration, Fannie Mae will offer the High Loan-to-Value Refinance Option and Freddie Mac its Enhanced Relief Refinance℠. Both programs will reprise their predecessor’s no maximum LTV ratio requirement in addition to other flexible guidelines.
Government Streamline Refinances
If you hold any of the above government-backed loans, you could qualify for your respective streamline refinance program. Each – FHA Streamline Refinance, VA’s Interest Rate Reduction Refinance Loan, and the USDA’s Streamline Refinance – has no LTV restriction.
Other than that, each streamline refinance program has varying eligibility requirements, e.g. waiting period before you can refinance, credit score, appraisal.
2. Other Options
If a refinance is out of the question, you could try out some of these solutions in the meantime.
- Smart move. You can rent out your home and move out to a more affordable rental property. This is practicable if your home can command a rent enough to cover your mortgage payment and the home’s maintenance. The challenge lies in finding another property to move into and the moving costs of course.
- Part-time work. If you are still able, taking on a second or part-time job might tide you over so you can continue paying back your mortgage.
- Start with your lender. In situations like an underwater mortgage, your lender or loan servicer should be the first to know about your struggles. They know better how you can stay on top of the situation, e.g. whether you qualify for a refinance and so forth.
Despite owing more than your home is worth, you should continue making payments toward your underwater mortgage. Discontinuing payments will only lead you to default or worst foreclosure, something that you should avoid at all cost.
Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.