Upside Down Refinance

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Mark CappelDec 30, 2010
Key Takeaways:
  • Refi Plus loans may be available for up to 125% of a home's value.
  • FHA Short Refinance loans require the lender to forgive at least 10% of the mortgage balance.
  • Some loan modification programs are offered only when a borrower is behind on the mortgage payments.
Options for homeowners who owe more than their home is worth

We need to refinance our home and we are upside down. We have been told the only way to refinance is to miss two payments. Is there a way to do this without having a negative impact on our excellent credit rating?

Thank you for your question about refinancing your mortgage for your property that you owe more on than it is worth. Your options to refinance your loan are limited when you are upside-down on your home.

You did not say what goal you want to accomplish by refinancing. Are you trying to lower your monthly payment, due to difficulties making your monthly payment? Do you want to take cash out of your home’s equity to pay for something?

I don’t believe what you were told about refinancing was accurate. If you were to miss two mortgage payments, I don’t think your lender would approve you for a refinance loan. I think it is much likelier that you could need to miss two payments in order to meet your lender’s requirements for a loan modification. According to the US Dept. of Housing and Urban Development (HUD), "a loan modification is a permanent change in one or more of the terms of a mortgagor's loan, allows the loan to be reinstated, and results in a payment the mortgagor can afford." Some lenders will not approve anyone for a loan modification unless he or she has first fallen behind on the mortgage payments.

If it is not a loan modification that you seek, but a refinance, there are a few programs that exist for borrowers who are upside-down on their mortgages.

Refi Plus

One program is called ‘Refi Plus.’ Refi Plus loans are available only for loans that are backed by Fannie Mae or Freddie Mac. In theory, Refi Plus loans can be offered up to 125% of the value of your property, but it seems that most lenders will not lend beyond 105%.

FHA Short Refinance Program

A second program designed for upside-down borrowers is the FHA Short Refinance program. The Federal Housing Administration (FHA) initiated this new government loan program to assist homeowners who have seen their property values drop. The program began on September 7th, 2010 and is slated to run through December 21st, 2012. The goal is to help borrowers in a negative equity position refinance into a more secure loan. Under the FHA Short Refinance program, a lender reduces the principal balance on the mortgage. The reduced-balance loan then passes from the private hands of the lender or investor that owns the loan to a loan that is guaranteed by the federal government. Previous government programs attempted to aid those who are behind on their mortgage payments. The new FHA Short Refi is targeted to borrowers who are current and can afford their payments, borrowers who could not qualify for the different loan modification programs available.

FHA Short Refinance Requirements

The FHA Short Refinance program has a lot of restrictions. In order to qualify for the program a borrower must:

  1. Be up-to-date on the payments for the current mortgage
  2. Be in a negative equity position
  3. Live in the property as the primary residence
  4. Have a current loan that is NOT an FHA guaranteed loan
  5. Meet FHA qualifying rules for debt-to-income ratio
  6. Have a credit score of over 500
  7. Receive at least a 10% reduction in the principal balance from the current lender
  8. Not exceed a loan-to-value of 97.75% on the new FHA loan

Requirements for Properties with Second Mortgages

Properties with second loans or home equity lines of credit (HELOC) have additional restrictions:

  1. Any second loan must agree to be subordinated
  2. If the borrower has a second mortgage the combined loan-to-value can reach 115%.
  3. The second loan cannot call for a balloon repayment, for a minimum of 10 years, unless the property is sold or refinanced.

Previous loan modification is not a barrier

Even borrowers who have gone through a loan modification may qualify for the new FHA Short Refinance program. If a borrower went through the Making Homes Affordable Program, he may be eligible for the new FHA program in the month after the loan modification was made permanent. A three month on-time payment history is required for eligibility for any borrower who had a loan modification outside of the Making Homes Affordable Program. In fact, the new FHA Short Refi may be an ideal way for someone who has completed a loan modification to further improve his or her financial position.

FHA Short Refinance Negatives

Potential negative effects of the program include an FHA requirement to purchase mortgage insurance, closing costs for the new loan, and the chance that a lender can report a reduction in the principal balance to the credit bureaus, harming the borrower's credit score.


I recommend you look at both the FHA Short Refinance and the Refi Plus program. If you are not eligible for either program, then you need to weigh the potential benefits of a loan modification program’s lower monthly payment against the negative effects of missing mortgage payments, which your lender seems to require before a loan modification application will be reviewed.


MMae Williams, Mar, 2013
First mortgage is a BOA 7.65% (New York Mellon Investor), an old Countrywide mortgage non-Freddie, non-Fannie, non-FHA with a balance of $369k. Second mortgage is an HFC Beneficial at 10.14% with a $100k balance. Combined $469 balances and a Zillow estimate of $335k. So underwater on both. On time both last 12 months. Had to mods in past 5 years — one in 2008 due to Countrywide selling to BoA. The mod came in the mail. And in 2011 capitalization of past due amounts to stop foreclose. Balance went from $345k to $369k mod because of illness. Fully recovered. Never missed payment since Oct 2011.

Now, recently reduced income by 20%, but even with reduction mortgage payment not 31% of income on first, but with 1st and 2nd combined payment is 33% of gross income. Would like to short FHA refinance, or combine 1st and 2nd and do principal reduction in order to FHA short refinance to get within the 97.5% for FHA and 115% for FHA combined 1st and 2nd. WHAT ARE MY OPTIONS? BoA and Beneficial give me a serious runaround. can I go to another servicer to accomplish this?
BBill Admin, Mar, 2013
Mae, the problem with the FHA Short Refi program has been that lenders have not been very cooperative. You need your lenders to reduce your principal balance by at least 10%. The new lender has to be FHA approved. You can find a list of FHA approved lenders by using this tool at the FHA Web site. Even if you find a cooperative new lender, you still have to get the reduction from your current lenders.
NNambi Srinivasan, May, 2012
Hi Bill, My loan got re-modified 2 years back to match with the Market Price with set-aside payment to be settled after 30 years. Do you think I will be eligible to write-off the Set-aside amount? Thanks - Nambi
BBill Admin, May, 2012
You need to take the contract to a tax professional who will review the terms of the agreement and advise if/when you are able to claim any write-offs. It is quite likely that your contract has a clause that the set-off amount is not written off until you have completed the contract.
SSab Bonavito, Jan, 2012
I've got a 1st and a 2nd Mortgage on my home. The main loan is owned by Freddie Mac. I would like to take advantage of HARP, but it doesn't seem like I can because I have 2 mortgages. The FHA refi's and principle reduction plans don't work for me, because my current mortgage service providers don't make or refi mortgages and don't participate in the program (My mortgages are serviced by CENLAR and 21st mortgage as a result of TBW going belly up). So seeing as how the option of principal reduction is out, can I refi under HARP at a LTV of 125% with a new participating lender if the new loan at an LTV of 125% would pay off both the first and second mortgages I currently have? Under the previous rules, a HARP refinance could not pay off a 2nd mortgage. Is this still valid? And do I have alternatives? I have excellent credit (750).
BBill Admin, Jan, 2012
A HARP 2.0 mortgage loan will not refinance your second mortgage. HARP 2.0 is set up with a goal of making second loan subordination easier, but the second loan will not be consolidated with the first. HARP may help you lower your rate on your first mortgage but will not help with the second.
AAmy Dowds, Jan, 2013
If i qualify for the HARP 3 but my private mortgage servicer will not participate..Do I have any other options?? I'm in a ARM paying 8% for the past 5 years. We had some financial trouble 10 years ago..we have been good for the past 5 years and could get a normal mortgage but now we are underwater...ugggh..any advice?
BBill Admin, Jan, 2013
Amy, at the moment, there is no formal HARP 3 program. HARP 2 is the latest version that exists and it requires that your loan be backed by Fannie Mae or Freddie Mac (along with other requirements you can read about on our HARP page).

If you don't qualify for HARP 2, you'll have to wait and see if an expanded HARP 3 program that may be passed into law this year will offer you an opportunity to refinance.
MMyra G., Feb, 2013
Please update me with any program. We recently did not pursue our refi application on our jumbo mortgage (30 yrs fixed 6.875% owned by 53rd) and we aren't qualified for Harp 2.0 nor loan modifications bec. we are paying bi-weekly. We are barely making ends meet on a 524k loan and our mead FICO suffered now at 651. What's our option for a refi at this time. Please keep us up to date with new HUD programs offering loans not backed by Fannie Mae and Freddie Mac.
BBill Admin, Feb, 2013
As things currently stand, based on the characteristics of your loan as you described it, I am not aware of any options that you have other than trying to work things out with your current lender.

Is there a specific reason that you did not pursue a refi application, if one was available to you? As a jumbo-loan holder, you have fewer options.
SSabrina Hubbard, Mar, 2013
In October 2010, I refianced through HARP (4.75%) and Freddie MAC took over my loan, chase is the services my loan.I owe 283K and my townhouse is now worth 165K, how can I refi again? I was told that I don't qualify for HARP II and that I'm not in a finaancial hardship.. I need help and wnt to reduce my interest rate if I'm stuck wtih this loan.
BBill Admin, Mar, 2013
Sabrina, as the rules currently stand, you can't do a second HARP loan. Many people are in the same boat you're in. Unless there is an expansion to the program, you won't be able to refinance. It may be of little comfort, but 4.75% is a fantastic rate historically.