Negative Equity: Options If You're Upside Down in Your Mortgage

More Americans find themselves in a position of negative equity -- owing more on a mortgage than the home is currently worth. By itself, negative equity isn't necessarily trouble. Those who can afford their monthly mortgage payments and have a safe loan structure can wait out the market until home values improve.

For homeowners with riskier loan structures, such as interest-only or short-term ARMs, negative equity is a bigger problem. It can hamper their ability to refinance to a more stable loan and can set the stage for possible foreclosure.To prevent those from happening, government entities have devised a loan programs that throw cash-strapped homeowners a lifeline.

See which may be right for your situation:

Refinancing Options for Homeowners Facing Negative Equity

These programs are for homeowners making timely mortgage payments but who need to move out of risky loan programs or into lower interest rates. Owners will still have negative equity after refinancing but will be in a better loan program.
  • Freddie Mac Relief Refinance Mortgage: Qualifying owners can refinance into a fixed-rate mortgage with a loan-to-value ratio of 125 percent (they owe 25 percent more than their home is worth). This program is also filed under the Home Affordable Refinance Program (HARP).
  • Fannie Mae Refi Plus: It works like the above program, for refinances of existing Fannie Mae loans. This program is also filed under the Home Affordable Refinance Program (HARP).
  • FHA-Insured No Appraisal Streamline Refi: Homeowners in good standing can refinance their Federal Housing Administration-insured mortgage into a lower rate without an appraisal or employment verification. A loan-to-value ratio does not factor into this product, so someone could owe 35 percent more than the value of a home and still qualify.
  • HOPE for Homeowners: Homeowners can refinance into an FHA-insured loan with lower rates and better terms, however, they must agree to share future equity of the home with the FHA.

Modifying Loan Agreements to Wipe Out Negative Equity

These more radical options forgive (or reduce) money owed. These options also carry penalties against one's credit score, and willing lenders are harder to find.
  • FHA Refinance for Conventional Borrowers in Negative Equity Positions: Instead of a short sale of a home, this program is like a "short refinance." Negative-equity homeowners unable to pay their conventional (non-FHA) loans can refinance into an FHA-insured loan, but the current lender will have to write off the negative equity owed to bring the new FHA-insured mortgage down to 97 percent of value. Homeowners who already have an FHA-insured loan are ineligible.
  • Short sale: The lender agrees to permit homeowners to sell their property at current market value and absolves the owners from owing any negative balance. The bank writes off the difference. While the borrowers will suffer credit damage, it's far less than credit damage from a foreclosure.
  • Loan Modification: In a loan modification, the lender agrees to change the terms of the loan contract. The amount of the loan (or negative equity) can be reduced or terms can be changed. Borrowers remain with the same servicer and will have credit damage.

Getting Help With Negative Equity Solutions

Most homeowners will need assistance finding the right loan program and a lender willing to underwrite it. Banks servicing Fannie Mae and Freddie Mac loans are required to support a 125 percent loan-to-value refinance. All other programs are voluntary.
  • Reach out to your loan servicer: An easy place to start is with your own lender. Call before payment defaults and ask about the programs they support.
  • Contact a reputable mortgage broker: Borrowers with fair credit and good payment standing may benefit from working with a broker. "I would do the shopping for my clients to find out which lenders have the best programs for their situation," says D.C.-metro real estate veteran Andre Barnes. He tries to steer his clients away from credit-damaging programs, if possible. Ask seasoned Realtors for referrals to find a broker that you trust.
  • Take advantage of free counseling: Find a HUD-approved housing counselor in your area. Call 1-888-995-HOPE (4673). "We are trained in accordance with the Making Home Affordable programs to advocate on behalf of homeowners who are underwater," says a counselor with Affordable Housing Centers. Most of their calls are from borrowers who are already behind in their payments.
The FHA's HOPE program is a vote of confidence that home equity will return. Odds are they're right, if we all sit tight.

For more insights on foreclosure and related topics see these AOL Real Estate guides:
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