Can you refi when you're upside down?

Recently Bankrate's Holden Lewis answered common questions about refinancing.

In this article, he answers questions about falling home values and how to qualify for a refinancing. The broad question was developed from specific situations readers described to him. Over the next few weeks, he'll be answering questions on many aspects of the refinancing dilemma. Lewis' blog, Mortgage Matters also provides answers and insights on the mortgage crisis.

FAQs about refinancing mortgages: Part 2
  • What happens when the home's value has fallen?
  • What are the potential problems with qualifying for a refi?
  • Is a down payment necessary?

What happens when the home's value has fallen?

Q: House values are dropping, so I'm not sure if the appraisal will be enough. Are the values based on sales? So that means even with the lower rates, I may not be able to refinance? Is that true?

Q: I decided to refi my first and second mortgages. I had a good rate of 5.5 percent. Then the appraisal came in at $60,000 less than expected. Now I'm stuck because the equity/mortgage basis puts us in the PMI penalty. Online calculators don't account for what will happen if the local housing market has taken a 5 (percent) or 10 percent hit since you bought your property.

Q: Is there any way around a situation where your credit is great and you've been approved for a mortgage, yet the appraisal of your house will not come in high enough?

Q: My husband and I "mistakenly" refinanced last April into an option ARM. Now that we realize the nightmare we are in, we would like to refi again into a 30-year fixed. Based on our income and good credit, qualifying may not be a problem. The problem is that our loan balance currently exceeds what our home would now appraise for, since values have dropped drastically since 2005, when we purchased the home at the height of the market. Are there any programs out there for people like us that have a loan-to-value exceeding 100 percent?

Q: I am looking to refi before my mortgage reset in June. However, I cannot get a loan through Wells Fargo because of the amount I owe versus the value of my property is higher, about $25,000, based on the comp in San Diego. So, the bank wants me to come up with the $25,000 and they will process my loan. My FICO is 760, income is good. What should I do? If I can't get a refi going, I don't think it is worth paying the reset amount then. Is walking away from all this my best solution? Or what other suggestion do you have?


Holden Lewis: When you're buying a house or refinancing a mortgage, it's easy to get caught up in your own point of view and ignore the other guy's perspective. You want a house, or a lower mortgage payment, and an appraiser is standing in the way.

Look at it from the lender's perspective. Home values are falling and new foreclosure filings are at a record pace. Competing lenders -- the ones that made poor decisions -- have gone out of business, and you don't want your company to follow them into oblivion. You don't want to lend to anyone with less than 10 percent equity. And here's an application from someone who wants to borrow more than the appraiser says the house is worth.

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