Can I Refinance if My Home Is Worth Less Than the Balance of My Mortgage?

by Don Rafner

Mortgage lenders typically require that you have at least 20 percent equity in your home before they'll approve you for a refinance. You might not be able to meet this requirement if your home's value has fallen since you purchased it. You might even have negative equity, meaning you owe more on your mortgage loan than what your home is worth. Fortunately, you do have options to refinance a so-called underwater home. The process, though, is more complicated.

Call several mortgage lenders -- not just the one to which you are already sending your monthly mortgage payments -- and explain that you want to refinance your mortgage, but you worry that you owe more on it than what your home is worth. Ask these lenders if they're willing to refinance your loan even if you have negative equity. Also ask them if they participate in the federal government's Home Affordable Refinance Program (HARP) or FHA Short Refinance. Both programs provide financial incentives to lenders that refinance the loans of underwater homeowners.

Give your lender permission to send an appraiser to your home to determine its current market value. If your home appraises for a higher value than you expect, you might qualify for a traditional refinance. If it doesn't, and the value is low enough so that you have negative equity, your refinance, if it goes through, will be more complicated.

Determine whether you qualify for the FHA Short Refinance or HARP. For the FHA Short Refinance, you must be paying off a mortgage loan not owned or guaranteed by Freddie Mac, Fannie Mae, the Federal Housing Administration, U.S. Department of Veterans Affairs or U.S. Department of Agriculture. You must also be current on your mortgage payments and occupy the house as a principal residence. Your total monthly debt must not equal more than 55 percent of your gross monthly income. To participate in the Home Affordable Refinance Program, you must be paying off a mortgage loan owned or guaranteed by Freddie Mac or Fannie Mae, and you must be current on your mortgage payments. You must not have missed a mortgage payment in the last 12 months.

Fill out your lender's Uniform Residential Loan Application, Form 1003. This form asks for your basic information -- full name, address and Social Security number -- and your income, debts and place of employment. You'll also have to declare that you haven't suffered through foreclosure or declared bankruptcy in the last seven years.

Make copies of the following financial documents: your last two paycheck stubs, income-tax returns from the last two years and last two months of bank statements. Your lender will use these documents to verify your income.

Sign the closing documents, and pay any closing fees, if your lender approves your request for a refinance. Signing the closing documents will officially terminate your old mortgage and replace it with a new one.

About the Author

Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.

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