No one wants to face the reality of being upside down on their home, but it is a reality for many. Housing values are still trying to come back in many areas, leaving many people with negative equity in their home. Even the homeowners who try to stick it out and wait for values to come back need an option to save money. Once they realize they are throwing money away each month because they have no equity in the home, it becomes hard to want to stay in the home. Luckily, there are a few refinance options for those facing these circumstances.
Determining if you are Underwater
The first step is to determine if you are, in fact, underwater on your home. Just because you heard values dropped in your area, doesn’t mean you have negative equity. If you can afford it, pay for an appraisal on your home. This way you know the exact value of your home and how it compares to your outstanding principal balance. Oftentimes it is not as bad as you think. Sometimes values bounce back and you don’t realize it or you heard things were worse than they really are. If you do find out that you are underwater and you cannot afford your payments, then you have a few options.
Start With Your Lender
The first piece of advice is to start with your lender. There still may be options available to modify your loan. Lenders want you to keep your home, so they are often willing to do more than you realize. Even though the HARP and HAMP options are no longer available, lenders still have their own options. There is a major difference between providing a borrower with assistance to make the loan affordable and taking the home in foreclosure. At least, when a lender helps the borrower make the payments easier to afford, the bank still makes money. If the bank must take possession of the home, it costs them a lot of money. In many cases, they don’t make any profit on the home even after they sell it.
Lenders have a few options to help you modify your loan. Your exact circumstances help them to determine what will work the best for you. A few options include:
- Stretching the term of your loan – Lenders cannot go beyond 30 years in most cases, but if you already paid on your loan for several years, the lender may be able to add those years back on. This enables them to amortize the loan over a longer period of time, which lowers your payment and makes it more affordable.
- Lowering your interest rate – Some lenders can lower your interest rate in an effort to make your payment more affordable. Some mortgage lenders may be reluctant to do this because it affects how much profit they make on your loan. Again, though, if it means foreclosure or lowering your interest rate, some lenders opt for the lower rate.
- Writing off principal – This method is often a very last resort because it requires the lender to take a loss on a portion of your loan. Writing off a portion of the principal, though, helps you to pay the loan down faster and gain the equity back in your home that you lost. Because HAMP and HARP are over, though, many lenders don’t opt for this option.
A few loans that allow you to refinance despite your upside down status are the government-backed loans. The FHA and VA loans offer a streamlined program that allows anyone to refinance despite the value of their home. The streamline program does not require borrowers to verify their income, assets, credit, or the value of their home. This is how borrowers are able to get away with refinancing with no equity in the home. As long as borrowers have a positive housing history, meaning no late payments on their mortgage in the last year, they often qualify.
The FHA and VA both have the same requirements regarding the streamline refinance. There must be a benefit to the borrower in order for it to go through. Usually, the benefit means a lower payment. The VA, for example, requires borrowers to have more disposable income at the end of each month in order to qualify. This is possible with a lower mortgage payment. The FHA streamline program requires borrowers to lower their interest rate, which means money saved each month. If you have a government-backed loan, don’t hesitate to take advantage of the streamline programs offered.
The good news is that you have options if you need to refinance and are upside down on your home. The bad news is you have a lot of work ahead of you. If you have an FHA or VA loan, the process will definitely be easier for you. If you don’t, you may have to work really hard with your lender. Some lenders are willing to help, while others are more reluctant. Don’t give up, though. If you want to keep your home, you have options. The key is to keep up with your payments as best as you can.
If you do find that you fall behind on your payments, don’t wait to talk to your lender. The longer you wait, the worse the situation becomes. Once you are too late on your payments, the lender does not have a lot of options to help you. When you communicate right away, though, you have a better chance at finding ways to rectify the situation. Most lenders are willing to work with borrowers who communicate their needs and demonstrate the desire to keep their home. It also helps if your situation is a temporary thing, especially if it is due to an illness or injury.
Showing your lender that you are willing to work with them and want to keep your home can open more doors for you than your realize. Talk to your lender today about your refinance options despite being upside down.