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Advice on Refinance Without Equity

How can I refinance into a fixed rate loan, without having to come up with the money to meet the LTV ratio of a lender?

My home has lost value due to the real estate market. I need to refinance in a couple years, before my interest rate adjusts, but I feel the value will not be what I paid for it. How can I refinance into a fixed rate without having to come up with the money to meet the LTV ratio of a lender? I don't want to lose the home but if the lender gives me no alternative I guess I will have to.

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Bill's Answer
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Updated: Oct 23, 2014

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Highlights

  • Understand that your options are limited, when refinancing without equity.
  • Try to work with your lender to modify your loan.
  • Consult with an attorney, before you let a foreclosure take place.

Many Americans face the same financial difficulties you face. Many borrowers with less than perfect credit took out sub-prime loans that had a fixed interest rate for a few years, then were set to adjust. 

These loans were sold to you and others with the assurance that it would be easy to refinance. Often, borrowers were told that paying on the loan for the first few years would be a 'band-aid' that would help improve their credit to the point that the next refinance loan would be a prime loan at the lowest interest rates available.

What Goes Up Must Come Down

Unfortunately, another assumption that was not discussed much was that home values would keep rising. After all, they had been going steadily upward for years.  Instead, home values have plummeted, leaving many borrowers  owing more on their homes than the homes are worth, and finding out that refinancing without equity is a big problem.

Refinance Options

Refinancing without equity is very difficult. Few lenders offer loans above 90% of your home's current, fair-market value.  Theoretically, one could pay down the loan balance, but who has that kind of money? The credit market has tightened up. The days of 100% refinancing have disappeared, even for borrowers with excellent credit and strong income. Most lenders will not lend more than 90% on a refinance loan and some cap the loan amount at 85% or 80% of your home's value.

There are a few options for borrowers who seek refinancing without equity:

  1. FHA loans- FHA loans are available for 96.5% of your home's value. FHA loan amounts are limited to a certain dollar amount, based on the county in which you live and the FHA loan limits are set to adjust downward in October, 2011. If you have no equity, but are not underwater, you may be able to come up with 3.5% of your home's value, in order to meet the FHA loan-to-value requirements.
  2. Refi Plus- If your loan is owned by Fannie Mae or Freddie Mac, the Refi Plus program rules allow you refinance your loan up to 125% of your home's value. However, research we have done at Bills.com has only found lenders who are willing to loan up to 105% of your home's value. Still, 105% is refinancing without equity. If you want to know if your loan is owned by Fannie Mae or Freddie Mac, you can look it up online.
  3. FHA Short Refinance- In order to get an FHA Short Refi, your lender has to agree to reduce your mortgage's principal balance by at least 10%. If your lender does this and you can find another lender willing to finance your loan, then the FHA will guarantee the loan. The biggest sticking point in this program is that lenders have been very reluctant to write down the principal balance.  Essentially, few lenders are participating in the program.

Foreclosure Alternatives

If you are not able to refinance your loan, what steps you take depend a lot on whether or not you can afford to make your mortgage payment. If your income has dropped or if your loan payment adjusted upwards, when you can't make your mortgage payment, you are left with only a few options, none of them excellent.

  • Loan modification- You can try to work with your lender to modify the terms of your loan. The federal government has introduced programs, HAMP and HAFA, that have not succeeded in helping a vast number of borrowers. There many stories from borrowers who feel that they were stuck in some kind of Alice in Wonderland world, when trying to work out a loan modification. Someone at the lender's office says that no modification won't be considered without the borrower being a few months behind on the mortgage. When the borrower stops making payments, in order to get the modification, the lender starts foreclosure proceedings!
  • Short Sale- A short sale is when you sell your home and your lender agrees to accept less than you owe on the balance of your loan. It generally requires that you prove to your lender that you are unable to meet your obligations by making a full financial disclosure. You may or may not end up responsible for the difference between what your home sells for and what you owe on your loan, which is called the deficiency balance.
  • Deed-in-Lieu of Foreclosure- In a a deed-in-lieu of foreclosure, you give the property to your lender voluntarily and the lender agrees to cancel the loan.  In a deed-in-lieu, the lender agrees to not initiate a foreclosure or to stop any foreclosure proceeding that have begun. It is the lender's choice whether or not to forgive the deficiency balance.

Please read the Bills.com article that compares a short sale to a deed-in-lieu, for more information, including a discussion of the potential tax liabilities you may face.

Foreclosure

If you can't work out a solution with your lender, you may need to consider allowing the home to go into foreclosure and then filing for bankruptcy protection, to protect yourself from collections for any deficiency balance that remains.

Before you allow your home to go into foreclosure, you should consult with an attorney in your area, to make sure you understand all the potential consequences of a foreclosure and what steps you can take to best protect yourself from those consequences.  In some states, loans that were used to finance the purchase of a home are non-recourse loans. This means that the lender has no recourse to come after you for any deficiency balance. Whether your loan is a recourse loan, where the lender can come after you for the deficiency balance, or a non-recourse loan will play a big part in the choice you make.

I wish you the best of luck in finding a refinance loan that meets your needs or working out a the best solution you can.

I hope this information helps you Find. Learn. Save.

Best,

Bill

bills.com

5 Comments

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  • MM
    Apr, 2012
    merridy
    I have the same problem I have a loan with GMAC and I could them to roll over my loan to a fixed 4% 30 year so I can get it payed off but since I owe $20,000 over the the value they will not help me, I have had this home for over 30 years and I had a 5% interest only loan on it before I went to Irac 06-07 but when I got back off med hold in 2009 the housing market fell and I could not sell the home, GMAC raised the rate to 5.875 and now they are going to raise it up 3.75 more. It makes no sense that they would rather me let it go back to them then have me pay it off. I have a 809 credit score and not mist one payment but as we can see there all corrupt from the top on down.
    1 Votes

  • 35x35
    Sep, 2008
    Anjan
    I would be careful before walking away. California has a weird rule about deficiency balances being recoursable once the purchase loans are refinanced. That means that they can come after you for the deficiency balance after the foreclosure sale. I would consult with a loan professional. Best is to keep trying to work with your lenders.
    0 Votes

  • MB
    Sep, 2008
    michael
    We find ourselves in a similar situation. Briefly here it is; San Diego, 2005 we buy a house for $462k. 5% down, 1st & 2nd. interest only for 5 years. In 2006 we convert 2nd. to 30yrs./6.25%. Total monthly payments approx. $2,200 of that $1,600 is interest only on the 1st. & $600 is for our 2nd. In 2008 our house is now worth $300k. Our payments are not a problem, the problem is we can't refinance our 1st. (LTV). I contacted the lender and asked them to consider re writting the loan at todays value. This is my reasoning; For us to continue to pay on an interest only mortgage that is much higher than the actual value of the house is throwing money away. Secondly if we walk from the house the lender will have to sell & will be lucky to get 50% of the original loan after expenses, etc. It would make a lot more sense for them to write down the loan, keep us in the house, avoid more inventory, actually get more money (I'm not asking for a 50% write down). Bernanke gave a speech on this subject earlier this year and encouraged the lending industry to do exactly that. Needless to say I haven't heard back from the lender. Any thoughts? Thank you.
    0 Votes

    • MA
      Oct, 2011
      MARTIN
      I am in a very similar situation and i just got told that my lender GMAC did not want to do a loan modification nor refinancing... i was not asking to reduce the amount that i owe them but just to lock the interest rate at the lowest i have seen it in a long time. I lost another house to foreclosure with wachovia and in general this is what i think about the banks.... they are a bunch of greedy MFs that do not want to help us so that we can help the economy move again.... wachovia chose to foreclosure so that they could get the tax write off from the government (our money) and GMAC told me that there was not equity on the house since it had lost so much value (about 30 to 40%) and that is what we are facing... we bailed these guys out and they do not want to loose anything! What a shame and really upsetting situation... in the meaning time our political leaders are fighting like little girls and people are starving... Republicans want to make the rich richer and Democrats do not have what it takes to get done what needs to get done.... and so the poor are getting poorer!
      5 Votes

    • RR
      Nov, 2011
      Robert
      I'm interested in hearing what happened to your loan. I am getting ready to send a letter to my lender with the same reasoning. Basically, I haven't missed a payment and I'd rather keep my property than to foreclose or shortsale, but knowing that I am 200K under makes it hard to justify our monthly loses. All I want is the opportunity to refinance at today's rates for today's market value.
      2 Votes