The last few years of economic upheaval in the U.S. housing market have left some eleven million homeowners “underwater”—owing more money than their homes are currently worth. When the remaining principle on the mortgage is higher than the assessed value of the home, it becomes exceedingly challenging to refinance the loan.
Banks and lenders are looking for collateral to secure a new loan, and in the case of a mortgage refinance, the collateral traditionally takes the form of equity in the home itself. Most banks require enough equity to equal twenty percent of the proposed loan, but of course an underwater loan has zero equity to offer.
However, it is not impossible to refinance an underwater mortgage. It’s difficult, but it’s not impossible.
The Home Affordable Refinance Program (HARP)
Certain underwater loans qualify for refinancing help from the federal government, through the Home Affordable Refinance Program (HARP). Those who qualify for this refinance might slash three or four hundred dollars per month from their mortgage payments. Needless to say, a decrease of that amount could make all the difference in being able to keep current on mortgage payments.
However, the qualification parameters for this refinancing option are rather restrictive. First of all, the homeowner must be entirely up to date with the mortgage payments. There must be no more than one missed payment in the previous year, and the last six months must be paid in full. These requirements, of course, eliminate any homeowner who is already on the road to home foreclosure. Arguably, the people who most need assistance are automatically disqualified from this particular program.
If the homeowner does meet this first requirement, there is a second condition that also must be met. The mortgage must be held by either Freddie Mac or Fannie Mae. Application details can be found on the government’s HARP website.
The Home Affordable Modification Program
Homeowners whose payment history disqualifies them from HARP aid might still find relief in another federal program; the Home Affordable Modification Program (HAMP) has less restrictive parameters. A homeowner with an underwater mortgage and missed payments can apply for this assistance if their mortgage is held by Freddie Mac or Fannie Mae, or by another lender who has signed on with the HAMP offer.
A homeowner who is unsure of who holds the mortgage can place a call to their lender and inquire whether they are participants in the government’s HAMP agreement. The homeowner must provide documentation that shows a financial hardship and proves the ability to make payments—and therefore the mortgage itself—is under threat.
The HAMP approach is not an actual refinance; instead, it alters the terms of the existing contract. The new terms can provide reduced payments for as long a period as five years. After five years, the monthly payments may increase again, but the increase is restricted to one percent a year, and will be capped when it reaches whatever was the market rate when the HAMP agreement was signed and enacted.
