How to refinance an underwater mortgage

If you owe more money on your home than it’s worth, you’ll need this information before you consider a refinance. (iStock)

Most homeowners never imagine that they’ll own a property that’s worth less than what they owe on it. Unfortunately, shifting markets, property deterioration, changes to the neighborhood, and foreclosures in the area can all affect the value of your home.

In this case, you may hear the term "underwater." Here's what you need to know.

What does it mean to be "underwater"?

When the market value of your home is less than the amount you still owe on the mortgage loan, it’s considered "underwater."  You may also hear the term “upside-down” when people refer to owing more on their home than it’s worth.

If you’re unsure whether your home is underwater, find out how much your home is worth and subtract what you owe. For example, if you owe $250,000 on your current mortgage loan, and the property’s market value is $200,000, lenders consider your property underwater by $50,000.

If you do owe more than what the property is worth, you may want to consider refinancing your mortgage to help save money. Plus, today's low mortgage rates help. To see if you qualify for a mortgage refinance today, enter some simple information into Credible's free online tools.

Make sure to use an online mortgage refinance calculator to determine if a refinance will help you save enough money to make the process worth your time.


Can I refinance an underwater home?

Most lenders won’t refinance a property that’s underwater because it has negative home equity. Typically, lenders want homeowners to have at least 20% (positive) home equity in a property before considering a refinance.

However, that doesn’t mean you’re out of luck. There are several refinance programs available that can help you get back on your feet. To learn more about how to refinance mortgages — and to see if you qualify, go to

If you find yourself underwater on your loan and unable to make your monthly payments, here are two things you can do:

  1. Talk to your mortgage lender
  2. Look into government programs for help


1. Talk to your mortgage lender

Before you do anything else, contact your lender. Explain your situation and discuss options with them. Lenders don’t want you to foreclose on your property because they lose money. Many lenders may be willing to adjust terms or rework your repayment schedule.

2. Look into government programs for help

If your mortgage lender won’t help or you need additional help, you may be able to get assistance through a government program. Some programs that may be able to help if you have an underwater mortgage include:

  • USDA Streamline Refinance Program
  • FHA Streamline Refinance Loan Program
  • High Loan-to-Value Refinance

USDA Streamline Refinance Program: The United States Department of Agriculture (USDA) offers mortgage refinancing for home buyers with guaranteed loans with little or no home equity. The program may not require a new appraisal, a credit review, or home inspections. Homeowners must have paid all mortgage payments on time for the last 12 months. Homeowners who purchased their home in a rural community qualify for assistance from this mortgage refinance program.

FHA Streamline Refinance Loan Program: An FHA streamline operates like the USDA streamline mortgage refinance, but it’s for borrowers with an FHA mortgage loan. The FHA Streamline Refinance Loan requires less paperwork and may not require an appraisal. Investment properties cannot be reappraised before a streamline refinance. You can use this refinance program even if your home is underwater. There’s no credit check, and you may be eligible for the FHA Streamline Refinance Loan even if you recently lost your job.

High Loan-to-Value Refinance: If Fannie Mae owns your loan and you’ve made your mortgage payments on time, you may qualify for a high LTV mortgage refinance. To be eligible for the program, you must have held your mortgage loan for at least 15 months and have paid your mortgage on time for the last 12 months. 

Talk to your lender about these programs. Even if they cannot offer a traditional refinance, they may be able to help you get more information about a streamlined mortgage refinance. Head to Credible to get in touch with experienced loan officers who can answer your questions.


What are your other options?

Even if you can refinance, should you?  It might not make sense to participate in one of these refinance programs if you plan to stay in your home for several more years. If you can’t qualify or don’t want to refinance, there are some other options.

Keep making payments

If you are able, stay in your home and continue making your current mortgage payments. When you can, consider making extra payments to try to build home equity. As the housing market fluctuates, you can help reverse the underwater status of your home by continuing to make your payments on time.

This option takes time, but if you’re planning on staying in the home anyway, and you can afford the monthly payments, this may be your best option. The housing market fluctuates, and your property value could go back up.

Sell the property

Alternatively, if you are unable to make your monthly payments, you may consider selling your property. While you are unlikely to make enough money back to pay off your loan, you may be able to reduce the amount you owe the lender.  

In the worst-case scenarios, you may opt for a short sale or walk away from the home. A short sale prevents foreclosure and does less damage to your credit than foreclosing on the property.

If you’re considering a home-refinance, and you’re unsure whether you qualify, visit Credible to compare rates and terms from multiple lenders.