Homeowners whose mortgage balance exceeds the current property value know the futility of trying to get a refinance. Refinancing options for so-called “underwater” mortgages are limited because most lenders require some equity in the property — ideally about 20 percent.
However, borrowers should not give up hope. Options do exist, especially via the government’s Making Home Affordable program.
First option: HARP
If you meet certain criteria, your underwater loan may be eligible for a refinance through the federal Home Affordable Refinance Program, or HARP. The program allows qualified borrowers to refinance a loan that is from 105 percent to as high as 125 percent of a home’s value.
However, not every underwater loan qualifies for HARP. First, you must not be on the road to foreclosure: Any delinquent payments in the past 12 months will automatically disqualify you from eligibility.
Second, either Fannie Mae or Freddie Mac must own the loan. You can find a loan lookup tool and other calculators at the government’s Making Home Affordable Web site.
Your ability to take advantage of HARP will depend on payment history and other factors including credit score, the structure of the current home financing and specific lender guidelines.
“Can it help everyone? No,” says Jason Bonarrigo, senior mortgage banker with Wells Fargo Home Mortgage of Boston.
However, Bonarrigo has closed several HARP loans and says it’s worth investigating eligibility.
“If refinancing through HARP can shave $300 or $400 off a monthly mortgage payment, it can sometimes make a difference between keeping and losing a home down the road,” he says.
Second option: HAMP
If you not only have an underwater mortgage but also have missed payments, you may qualify for HAMP, the federal Home Affordable Modification Program available through mortgage lenders.
To qualify, you must demonstrate financial hardship that puts your mortgage in imminent danger of default. The mortgage must be owned by Fannie Mae, Freddie Mac or by others signed up with the U.S. Treasury to qualify for HAMP. (Call your loan servicer to find out if it is participating.)
While the program provides government incentives (of up to $1,500) to lenders to process these modifications, the ultimate approval rests with the lender.
“HAMP is not a refinancing program — it’s a change to the contract terms … but it can lower your payments for up to 60 months,” says Michael Goldstein, a bankruptcy attorney and partner at Goldstein and Clegg in Lynnfield, Mass.
Beginning in the sixth year, a borrower’s mortgage rate may begin to increase, but no more than 1 percentage point a year until it reaches “the market rate at the time the modification agreement is prepared,” according to the Making Home Affordable Web site.
Lenders offer several different types of modifications, says John Walsh, president and founder of Total Mortgage Services in Milford, Conn.
“(The mortgage company) could amortize your current mortgage to a longer term, a lower interest rate or forgive some of the principal balance of your loan,” he says.
While a modification may be a good option for some, there are strict qualification guidelines, Walsh says. For example, the home must be a primary residence, the mortgage must be less than $729,750, the current monthly payment must be more than 31 percent of your current gross income, and you must be able to demonstrate you are having difficulty making the payments.
The loan modification also has a trial period of 90 days, after which the lender reassesses the borrower’s situation to see if he or she qualifies for the long-term modification.
Third option: reality check
Underwater borrowers who don’t qualify for HARP or HAMP may find themselves out of luck.
“Unfortunately, there are no other government-backed refinancing options,” Bonarrigo says.
But that doesn’t mean you shouldn’t try to negotiate a loan modification with your mortgage lender.
As an alternative to foreclosure, many lenders are willing to offer some kind of loan restructuring even without a government-backed program.
“Whatever you do, don’t bury your head in the sand,” Bonarrigo says. “Don’t wait for (a) foreclosure notice.”
If restructuring the loan is not an option, ask about the possibility of a short sale — which means selling your house at market value, with the remaining loan balance forgiven by the lender.
“A short sale is preferable to foreclosure, less of a negative impact on your life,” Bonarrigo says. “And given today’s climate, banks are open to it.”