Buying a home is almost always the most significant purchase that a person will make in their lifetime. Traditional investment knowledge tells us that purchasing real estate is one of the best ways to grow your net worth. But what if the property market takes a dip and the value of your home drops along with it?


If you are ‘underwater’ with your home loan, it means that the principal owed on the home is higher than the market value of the property. After the 2008 property crash, over 20% of homeowners had negative equity in their home. Being underwater can be an extremely stressful and disheartening situation for a homeowner. Fortunately, there are options for homeowners who find themselves in this predicament.



What is Refinancing?

Refinancing pays off the debt of the existing home loan and replaces it with a new loan. The new loan typically has more favorable terms or is more affordable to the borrower. Details can vary heavily dependent on the type of loan and your lender, but usually, the homeowner can use the equity accrued their home as leverage for their newly negotiated loan.

But what if you don’t have any equity in your home?



Refinancing Options With Negative Equity



Government Backed Programs

Initiatives for refinancing programs such as the Making Home Affordable (MHA) program are available to homeowners who are in negative equity. MHA works with homeowners in a number of ways, including refinancing assistance, help with negotiating loan term modifications, and support for the unemployed. There are also options for owners of FHA loans to refinance an underwater mortgage, as long as it is their principal residence and their mortgage is current and up to date.


The Interest Rate Reduction Refinancing Loan (IRRRL) program is a government-backed scheme available for homeowners with VA loans. However, as VA loans are provided through a lender, if your house is in negative equity, you will need to shop around and find a lender who is willing to move forward without an appraisal.



What About Second Mortgages?

Occasionally homeowners may feel the best course for them is to take out a second mortgage against their home. Refinancing a second mortgage carries more risk to the lender than refinancing the original home loan. The risk is incurred because if the borrower finds themselves in financial difficulty and has to foreclose on the home, the lender of the first mortgage is paid first.


When refinancing a second mortgage, it is much easier if you have the same lender for both mortgages. When a property is mortgaged by two different lenders, it is best to ask the second lender to subrogate its lien on the loan. By surrogating its lien, the second lender is allowing the newly refinanced mortgage to go to first place to get paid off if the home goes into foreclosure.


Government back initiatives such as the FHA Short Refi are also available for homeowners whose combined first and second loans are greater than the market value of their home – as long as it is no greater than 15%. For example, on a $200,000 home, you could owe up to $230,000 on your first and second mortgage combined and qualify. The FHA Short Refi is only available on homes loans that are not already FHA backed.


Refinancing your property becomes more difficult if you have negative equity. Lenders view negative-equity refinances as a risk, therefore it may be wise to seek free housing advice from a U.S. Department of Housing and Urban Development Department sponsored housing agency.