Can I Refinance With Negative Equity?

by Mortgage Nerd on November 3, 2011 · 2 comments

The sad and frustrating reality for many homeowners today is that they owe more on their mortgage than their home is worth. I am in that same boat as I owe owe about 105% of what my home is worth so I can relate to the frustration. Normally in this situation you wouldn’t be able to refinance to take advantage of the incredibly low interest rates, but thanks to a couple mortgage programs that the government has spearheaded it is possible to refinance with negative equity.

FHA Streamline Refinance Without an Appraisal

If you have an FHA mortgage on which you owe more than the value of your home you can still take advantage of refinancing to a lower interest rate by doing the FHA streamline refinance (without an appraisal). This program allows you to use the appraisal from your most recent FHA mortgage transaction, instead of doing a fresh one. This means that you save the cost of an appraisal (anywhere from $375 to $475) and that you can meet the 2.25% equity requirement that FHA requires on a refinance.

What’s the downside to this program?… The downside is that FHA won’t allow you to roll in any closing costs into your loan balance if you opt out of doing an appraisal. This means you will either have to pay for the closing costs out of pocket or take a higher interest rate so that your lender pays your closing costs for you (also referred to as a “no-cost refinance”, duh!). Another potential problem with an FHA refinance is that they are currently charging an annual mortgage insurance premium of 1.15% for loans with an LTV over 95% (1.1% for LTV’s under 95%….big whoop!). Many people that have FHA loans are only paying a .55% annual premium and so it’s possible that the higher mortgage insurance premiums eat up a big chunk of your interest savings.


This program is for all you people that got Conventional mortgage loans that were sold to Fannie Mae. To find out if Fannie Mae owns your loan, you can use this Fannie Mae Lookup tool.  Lenders like Wells Fargo, Bank of America, Citi-Mortgage, MetLife, etc. etc. will sell the loan to Fannie Mae without your knowledge because they continue to service the loan, take your payments, etc.

In a nutshell, this program allows you to refinance your mortgage up to a loan to value of 125%, meaning if you owe $125,000 on your home the appraisal only has to be $100,000.  You will be required to still qualify regarding income and credit and your loan must be owned by Fannie Mae. This is one of those programs where it might be easier to qualify with your current lender because they may grant you an appraisal waiver.

The interest rates on this program may be a little bit higher than a standard Conventional loan but it might also be a little easier to qualify because the guidelines aren’t as strict.

Freddie Mac Relief Refinance

This is basically the same program as the Fannie Mae DU refi plus but for those people whose mortgages are owned by Freddie Mac. Use the Freddie Mac Loan Lookup tool to find out if Freddie owns your mortgage.

The biggest difference that I have seen with this program is that it is not as easy to switch lenders as with the Fannie Mae program. If you are currently paying mortgage insurance it will be impossible to switch lenders. In fact, it may be impossible altogether to use this program if you are paying mortgage insurance, but a few lenders do allow it. You would continue to pay the same mortgage insurance premiums that you currently do. Also, be aware that this applies to those mortgages that have lender-paid mortgage insurance (where you took a higher interest rate but don’t pay monthly mortgage insurance).

Possible changes on the horizon

The recent rumor about the Fannie Mae and Freddie Mac relief programs has been that the government is going to lift the 125% LTV rule and allow anybody that qualifies to take advantage of the program, regardless of the value of their home.  This would help significantly more people because there are many people that owe more than 125% of the value of their home. With interest rates as low as they are (around 4% on a 30 year fixed as of 11/2/11) many people would be able to lower their mortgage payments and stay in their homes.



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