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All about Refinancing an Underwater Mortgage

  • Finance
  • Natasha Young
  • 8 minutes

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When your mortgage is underwater, it can be challenging, especially if you plan to sell or refinance your home. And you might have wondered what happens when you are behind on your payments and how to recognize warning signs that you’re about to default. Read to know more about refinancing an underwater mortgage. 

How to refinance an underwater mortgage 

Make sure that your mortgage is underwater 

To estimate the worth of your property, speak with a nearby real estate agent or use an online home value estimator. Here are some pointers to help you out: 

  • Determine how much you owe 

To determine your remaining principal balance, consult your most current mortgage lender. Call them and request more data on your loan payoff amount. Interest and other charges that have accrued since your previous statement are included in the payback amount. 

  • Know your home’s value 

You should determine your home’s fair market value once you have your mortgage payoff. Using real estate marketplace websites and comparing the property values of comparable homes sold in your community can give a rough idea. However, the most precise value estimate can come from getting an appraisal from a certified home appraiser. 

  • Calculate your equity 

You can calculate if you have an underwater mortgage by yourself. Subtract your home’s balance from its worth to find your equity. If your house is worth $500,000, but you owe $520,000, your equity would be -$20,000. Your mortgage is $20,000 underwater in this case. 

Reach out to your lender 

As soon as you realize your mortgage is underwater, contact your lender. Even if you are feeling anxious or overwhelmed, move forward. It’s advisable to communicate your circumstances to your lender and attempt to come up with a realistic solution. 

Weigh out your options 

It is possible to get out of an underwater mortgage via refinancing. Here are some options to check out: 

  • Fannie Mae high LTV refinance

For certain homeowners who have an underwater mortgage or are having trouble making payments, several specific programs can be of help. A high loan-to-value refinance can benefit borrowers who don’t qualify for a regular refinance if Fannie Mae owns their mortgage. Through this program, you might be able to lower your monthly payment, get a shorter amortization term, pay less in interest, or switch to a more stable mortgage, like a fixed-rate mortgage. 


  • Fannie Mae is the owner of your loan. 
  • The mortgage has been yours for at least 15 months. 
  • Your payments are up to date. 
  • You’ve never financed a loan before using Fannie Mae DU refi plus. 

If all conditions are satisfied, you may use the high LTV refinance option multiple times. 

  • Freddie Mac enhanced relief refinance 

The Freddie Mac enhanced relief refinancing can be a good option for you if you don’t qualify for a normal mortgage refinance owing to poor home equity or for any other reason. To find out if Freddie Mac controls your loan, speak with your lender. In that case, you might be qualified for the program, which might lower your interest rate or alter the way your loans are structured.  


  • Freddie Mac is the owner of your loan. 
  • Throughout the previous 12 months, you have not missed a mortgage payment. 
  • You need to have had your existing loan for at least six months.
  • FHA streamline refinance 

An FHA streamline refinance may make sense if you already have an FHA loan. “Streamline” refers to the lender’s minimal underwriting and documentation requirements. A property appraisal is actually not necessary for FHA streamline refinances, making it simpler for homeowners to refinance underwater mortgages. 


  • You need to have an FHA loan. 
  • Your mortgage must be current if you want to finance it. 

The simplified refinance procedure allows you to withdraw over $500 in cash. 

  • USDA streamline assist refinance 

When you need to refinance but are underwater, the USDA offers a program called streamline help refinancing that can be a good fit. If you currently have a USDA direct or guaranteed house loan, you might be eligible for a refinance loan if you have:

  • No or little equity. 
  • No house inspection or appraisal. 
  • No credit checks. 
  • No assessment of the debt ratio. 

You should be ready to shop around to find a qualified lender with the best interest rates as not all mortgage lenders offer USDA loans.  


  • A valid USDA direct or assured is required. 
  • Prior to refinancing, the loan must have been paid on time for 12 months. 
  • Your income cannot exceed the maximum annual adjusted income for your county or metropolitan statistical area. 

Should you refinance an underwater mortgage? 

A strategy is to refinance an underwater mortgage, but it is not the only one. If you don’t want to leave and think your home’s worth will eventually increase, you might also try to wait it out. Even though your mortgage is underwater, you can decide to hold onto your house if you intend to live there for a long time and can afford the mortgage payments.  

The property may eventually recoup all or part of its previous value. Analyze the causes of the decline in the market worth of your home in the interim. If it’s a result of the economy, you can wait it out if the low value is only transitory. 

What to do if you can’t refinance 

  • Short sale 

You might try to sell your house and convince the bank to accept whatever amount it brings in, even if it is less than the amount you still owe on the mortgage. Without the lender’s consent, this is known as a short sale and cannot be completed. This process can take months and involves a ton of documentation. If the only other choice is to wait for the bank to foreclose on your house, a short sale can be appropriate. 

  • Walk away 

Some underwater mortgage holders decide to “strategically default” and walk away from their overwhelming debt, losing their property in the process. While not ideal, many homeowners made this choice during the great recession. Before moving on, thoroughly consider this option. 

  • Pay down your mortgage balance 

Paying off your mortgage can be the easiest way out if you’re trying to get out of debt. Of course, many people may not have enough money in their budget to allocate more funds to their mortgage. Yet, if you’re able to increase your mortgage payment, you might be able to refinance when your outstanding debt is less than the value of your property. Remember that many lenders have minimum equity requirements for refinancing, typically 20%. 

  • Request a mortgage modification 

A loan modification with your lender is one possible choice for underwater mortgage relief. This agreement adjusts the terms of your house loan, as its name implies. Please know that a mortgage modification agreement is not the same as a refinance. And your lender is not obligated to provide you with new terms. To get your loan out of this situation, your lender may be willing to lower your principal sum. 

  • Request a deed-in-lieu of foreclosure 

A deed-in-lieu of foreclosure gives your lender possession of your house instead of you. You can perhaps prevent foreclosure and pay off your mortgage payment without having to do so. 

refinancing an underwater mortgage

Bottom line 

You are considered upside down on your mortgage if you owe more on your house than it is now worth. A dramatic decline in property values or multiple missed mortgage payments might cause this. There are alternatives, even when the circumstance is not perfect. 


Can I refinance an underwater mortgage? 

Yes, you can. The United States Department of Agriculture (USDA) has a program called “streamline assist refinance” that you might want to use if you’re refinancing an underwater mortgage. If you already have a USDA direct or guaranteed home loan, you may be eligible for a refinance loan even if you have little or no equity in your home. 

How do you deal with an underwater mortgage? 

Here are some options for you on how to deal with an underwater mortgage: 

  • Stay in your home and work to make it worth more. 
  • Refinance your mortgage. 
  • You should sell your house and use the money you get to pay off what you still owe. 
  • You can sell your house through a short sale. 
  • Give up on your house.

What is an underwater mortgage? 

An underwater mortgage, also called an upside-down mortgage, is a home loan with a higher principal than the home is worth. This happens when the value of your home goes down, but you still must pay off the original loan balance. It’s not just mortgages that can go underwater. Other loans can do the same. 

What are the two types of refinancing? 

There are more than two types of refinancing. Rate-and-term refinance, cash-out refinance, cash-in refinance, no-closing-cost refinance and streamline refinance. 

 Wanna get out of your upside down auto loan? Try refinancing. With Way.com, you get the best refinance options available to you. Use our refinance loan calculator, compare the loan rates, prequalify, and save up to $1850 a year on your refinanced auto loan. 

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