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How to Refinance an Underwater Mortgage

Updated on:
Content was accurate at the time of publication.

When a home’s value is less than the mortgage balance owed, it’s considered “underwater.” If you’re hoping to take advantage of low interest rates, you may be wondering how to refinance an underwater mortgage. Below, we’ll dive into the details of how to qualify for an underwater refinance program.

6 steps to refinance an underwater mortgage

1. Determine if you have an underwater mortgage.

Contact a local real estate agent or check an online home value estimator to get an idea of your home’s value. You may get some unexpectedly good news, considering that the percentage of underwater homes decreased in 39 states during 2021. In fact, only 3.4% of mortgaged homes in the country were considered seriously underwater in the third quarter of 2021, according to a report by ATTOM Data Solutions, a real estate research firm.The table below features the five states with the highest share of underwater mortgages:

StatePercentage of underwater mortgages

2. Find out what kind of mortgage you have.

Check your current monthly mortgage statement to determine what type of home loan you have. In order to be eligible for the underwater mortgage programs discussed here, your current mortgage must be backed or serviced by the following government agencies or government-sponsored enterprises (GSE).

  • Fannie Mae. Short for the Federal National Mortgage Association (FNMA), Fannie Mae is a GSE that sets rules for and buys conventional mortgages.
  • Freddie Mac. Similar to Fannie Mae, Freddie Mac (the Federal Home Loan Mortgage Corporation) helps fund conventional mortgages.
  • FHA. The Federal Housing Administration (FHA) insures loans to borrowers with lower credit scores than conventional guidelines allow.
  • VA. The U.S. Department of Veterans Affairs (VA) guarantees no-down-payment loans for eligible military borrowers.
  • USDA. The U.S. Department of Agriculture (USDA) backs loans for zero-down-payment loans for low- to moderate-income homebuyers in specific rural areas.

3. Have your old loan closing paperwork handy.

Underwater mortgage lenders will want proof of when you closed on the loan you’re paying off, as well as the type of mortgage you borrowed. Your loan closing paperwork should include a copy of the note and deed of trust, which will give them the important dates and loan program information they need.

4. Contact your current lender.

Your existing lender may be willing to offer you a lower rate if you reach out to them. It may also be helpful to have their offer in hand to compare to loan estimates from other lenders you’ll gather in the “shopping” step below.

5. Learn the underwater loan options.

Once you know what type of loan you have, you can match it up to the available underwater loan programs:

  • Fannie High LTV Refinance Option (HIRO). The HIRO program gives upside-down homeowners a way to refinance their Fannie Mae-serviced loan with minimal paperwork. This program is a HARP replacement program, operating in place of the Home Affordable Refinance Program (HARP), which expired in 2018.
  • Freddie Mac Enhanced Relief Refinance Mortgage (FMERR). Underwater borrowers with a Freddie Mac-serviced loan may be able to lower their rate or term with the FMERR program.
  • FHA streamline. Homeowners may be able to replace their current FHA loan with a new FHA streamline mortgage without income documents or an appraisal.
  • VA IRRRL. Short for interest rate reduction refinance loan, the IRRRL program allows military borrowers with a VA loan to lower their rates without much financial documentation.
  • USDA streamline direct. Qualified borrowers with a USDA loan can refinance if they can prove they’ll save at least $50 per month.

6. Shop around for your best underwater mortgage lender.

You may need to shop around more to find lenders offering the programs listed above.

Should you refinance an underwater mortgage?

It makes sense to refinance your underwater mortgage if it benefits you financially. Some good reasons to refinance an underwater mortgage include:

Using the savings to pay off your balance faster. You may be able to slowly pull your mortgage out of the water by paying off your balance with the extra monthly savings.

Reducing the term to pay your balance off faster. Switching from a 30-year term to a 15-year term will help you reduce negative equity much faster if you can afford the higher monthly payment.

Keeping the home long enough to break even on refinancing costs. If you’re in your “forever” home, or at least plan to keep the home long enough to recoup the closing costs, then an underwater mortgage refinance probably makes sense. You can calculate your break-even point by dividing your total refinance costs by the monthly savings — the result is the number of months it will take to recoup your expenses.

How to qualify for underwater mortgage programs

The minimum mortgage requirements for underwater mortgage programs are very different from regular refinance loans. In most cases, you won’t need to verify your current income or get a home appraisal. However, you will have to prove your loan is “seasoned,” which means a set time period must elapse since you took out the existing loan.

The table below gives you a side-by-side breakdown of the most important requirements for underwater mortgage refinances:

Underwater mortgage programCurrent mortgage payment historySeasoning of current mortgageAppraisal required?Income verification required?
HIRONo late payments in last six months
One late payment in last 12 months
15 months
Current loan was taken out after Oct. 1, 2017
FMERRNo late payments in last six months
One late payment in last 12 months
15 monthsNoNo
FHA streamlineNo late payments in last six months
One late payment in last 12 months
210 daysNoNo
VA IRRRLCurrent at time of loan210 daysNoNo
USDA streamlineNo late payments in last six months12 monthsNoNo

Alternatives to an underwater mortgage

  • Borrow money to pay down the balance. If you have money in a 401(k) or extra cash in your savings account, you can pay down the balance and refinance with a regular refinance program.
  • Sell the house. You can try to sell the home and pay cash for the difference between the loan balance and the price you get.
  • Work with your lender on a short sale. A short sale allows you to sell your home for less than you owe, subject to lender approval. Keep in mind that you may have to pay the difference between the loan sale and the mortgage balance, depending on where you live.
  • Request a loan modification. You can request a mortgage modification from your current lender if you’re unable to make payments. The lender may be willing to extend your loan term or reduce your interest rate to help make your loan repayment more affordable.
  • Request a deed-in-lieu of foreclosure. With a deed-in-lieu of foreclosure, you transfer ownership of your home to your lender. It helps you avoid foreclosure and may allow you to get rid of your mortgage balance without repaying it.

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