Underwater refinance is often the only option for people who owe more on their house than it is worth. The term refers to people who are figuratively “under water” with the status of their home equity. In order to give a regular refinance or home equity loan, banks usually require at least 20 percent equity in the home. This is problematic for people who bought their houses when the housing market was much better. However, there are still some options available to people in such a predicament. This type of loan may be risky to the lender.
The first option is a federal Home Affordable Refinance Program, commonly referred to as HARP. This permits refinancing of a loan that is between 105-125 percent of the home's value. There are some restrictions for this type of loan. Applicants cannot be facing foreclosure and cannot have any delinquent mortgage payments in the previous year.
Another requirement about this type of underwater refinance is that either Freddie Mac or Fannie Mae has to own the loan. Anyone holding a loan through another lender doesn't qualify for HARP. Credit score, lender guidelines and current home financing all play an important role in approval also. Although there are strict criteria, getting this refinance loan could eliminate a good portion of the monthly mortgage payment.
Those who are in distress and have missed payments in their recent mortgage history should also consider the Home Affordable Modification Program, also called HAMP. This should not be confused with HARP, as they are different programs. This is also a federally-funded program, made available through selected approved lenders.
In order to qualify for HAMP, applicants must demonstrate and prove financial hardship. The financial hardship must be severe enough to put a current mortgage in danger of default status. Much like the HARP program, HAMP also requires that the lender owning the loan be either Freddie Mac, Fannie Mae or any other provider registered with the U.S. Treasury.
HAMP is not a full refinance, but rather a change to the terms in the existing mortgage contract. It will effectively lower the payments for up to 60 months. This program is desirable for lenders to use, as it offers up to $1,500 in government incentives. However, the overall approval must be granted by the lender for this type of underwater refinance option. There may be additional programs, depending on the state of residence. These programs are the ones funded nationally by the government. Some states have their own state-funded hardship programs.