How to Refinance an Underwater Mortgage

underwater mortgage

After the housing market crash in 2008 many people found themselves underwater on their mortgage when their home’s value dropped.

If you owe more money on your home than it’s worth you are probably wondering how you can refinance your mortgage.

In this article we’re going to explore some of the refinance options available to borrowers who are underwater on their mortgage.

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What is an Underwater Mortgage?

When the loan balance on a property exceeds the fair market value the home is considered underwater. Homeowners with an underwater mortgage will have difficulty selling their home or refinancing their mortgage to take advantage of todays low interest rates.

This can be especially detrimental to homeowners with an adjustable-rate mortgage whose rate has increased to a point where they can no longer afford their mortgage payments.

Because most refinance loans require the homeowner to have at least a 20% equity stake. Refinancing an underwater mortgage takes a special type of refinance program. Fortunately the Government has stepped in and created programs that help those with a mortgage that’s underwater.

Home Affordable Refinance Program

In 2010 the Obama Administration created the HARP program to help homeowners with an underwater mortgage refinance their loan regardless of the loan-to-value ratio. HARP is available for all mortgage loans owned by Freddie Mae and Fannie Mae.

HARP is designed for homeowners whose property values have dropped and now have an underwater mortgage. Allowing them to refinance your mortgage into a lower interest rate reducing monthly payments by hundreds of dollars per month. Or refinance from an adjustable-rate mortgage into a fixed-rate mortgage.

In order to qualify you must be current on your mortgage payments with no more than a single late payment in the past 12 months. A credit check, asset and income verification, and a new home appraisal will be required. The minimum credit score required for HARP is 620-640 depending on the lender.

HARP Eligibility Requirements:

  • No late payments on your mortgage in the past 6 months and no more than one 30 late payment in the last 12 months
  • Property is your primary residence, investment property, or second home
  • Loan was processed on or before May 31, 2009
  • Property value has decreased
  • If you have little or no equity in your home
  • Your loan is owned by Fannie Mae or Freddie Mac. (Check the Fannie Mae Loan Lookup tool)
  • Have not used HARP previously

Streamline Refinance

If you have an FHA, VA, or USDA loan you can do a streamline refinance even if you’re underwater on your loan. A streamline refinance means the process is streamlined to be quicker and easier than a conventional refinance.

Another great benefit of streamline refinance loans is that they do not require income verification. In fact, some lenders may not even require a credit check.


  • Have a Government insured mortgage
  • 210 day waiting period
  • Current on mortgage payments
  • Refinance must produce a net tangible benefit
  • 620 credit score

Streamline Refinance Program Benefits

  • Home appraisal is not required
  • Lower your monthly mortgage payment
  • Income verification no required
  • Lower mortgage insurance premium
  • Reduced paperwork
  • Lower your mortgage rate
  • No pre-payment penalty