3 Possible Refinancing Options for Underwater Homeowners

With the housing bust several years ago, many homeowners found themselves owing more on their home than it was worth. Unfortunately, the situation has improved little, and people continue to find themselves going underwater on their mortgage. Since most home financing options require the owner to have at least 20% equity in the home, refinancing options for these underwater mortgages are slim – but some options do exist for those in this unfortunate situation.


HARP stands for the Home Affordable Refinance Program. While a Home Affordable Refinance Program is only available to those who meet certain requirements, it allows a home to be refinanced if the outstanding amount is between 105% and 125% of the actual value of the home. The limitations on the program are troublesome for many facing economic hardship, however: if there are any delinquent payments on the loan in the previous twelve months, the homeowner is automatically disqualified from being eligible for a HARP refinancing.

Second, since it is a government-sponsored program, it is limited to mortgages owned by either Freddie Mac or Fannie Mae. If you are not sure who owns your loan, there are websites like the government’s own Making Home Affordable site that let you look up that information easily.

Finally, even if your mortgage is owned by one of those companies and you have managed to keep up on payments, you still might not be eligible to refinance under HARP. Credit scores are examined like any other financing arrangement, as well as the lender guidelines and the current financing plan the home is structured under.

The many restrictions mean HARP may not be a viable solution for everyone, but if you do qualify, it can be a great way to keep a home you might otherwise have to leave, shaving up to $300 or $400 off the monthly payments.


HAMP, standing for Home Affordable Modification Program, is an option that might work for a homeowner who has missed some amount of payments in the past year. The main criterion for eligibility through HAMP is economic hardship that significantly impairs your ability to pay back your mortgage loan. In addition, the mortgage must be less than $729,750 in total, and the monthly payments must be more than 31% of the total gross income for the household.

As with HARP, it is primarily mortgages owned by Fannie Mae and Freddie Mac that may be eligible for HAMP treatment, though unlike HARP some other financial institutions may have signed up with the United States Treasury. Some economic incentive is provided by the government to the mortgage lender if they approve a HAMP program (up to $1500 in kickbacks), though ultimately it is the lender’s decision as to whether they will modify
your financing agreement.

Unlike HARP, HAMP is not a refinancing plan. The contract terms themselves change, usually lowering monthly payments for a period of 60 months. Afterward, it will increase by up to 1% per year until it reaches a cap agreed upon when the deal is first structured. The way these modifications are handled is up to the lender, whether the mortgage is extended over a longer term, the interest rate is lowered, or some amount of the balance simply forgiven. Modifications are run on a 90 day trial period, after which the lender decides if the borrower qualifies for a longer-term modification based on ability to repay.

Reality Check

If your mortgage is not owned by Fannie Mae, Freddie Mac, or another qualifying organization, or if you qualify for neither HARP nor HAMP for some other reason, there are no other government refinancing or restructuring options. But that does not mean all hope is lost: contact your lender, do your best to demonstrate the current situation, and see if an agreement can be reached.

Foreclosure is not often a good thing for a bank. Home sales are low in general, selling a home is expensive and time consuming, and the bank is unlikely to reclaim as much of the amount owed as they would otherwise – after all, if the home is underwater, it has already dropped substantially in value. For that reason, many banks are willing to take some loss on the initial financing agreement and come to some solution if you approach them early enough. Your options drop dramatically if you just ignore the situation until a foreclosure notice is served.

In the worst-case scenario, try and ask for a short sale instead of a foreclosure. In a short sale, the home is sold and whatever amount of the loan remains unrecovered from the sale is forgiven. It is not an ideal scenario for either party, but it might be enough to let
you move on and start a new chapter without significant baggage weighing
you down.

Brentt Taylor writes for Mortgage Loan, which is established year 1995 and owned by Mortgageloan Directories and Information LLC. The site provides information, tools and up-to-date news about mortgage and financial-related matters. The site aims to empower consumers create smart and better financial decision for themselves and for their families.

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