Government Refinancing Help for Upside Down Mortgages

Low interest rates are prompting a lot of homeowners to refinance their mortgages right now. But many people experience an unpleasant surprise when they contact their lenders about refinancing their homes. Much to their dismay, they find out they are upside down in the mortgage loan, which makes it almost impossible to refinance.

But there are certain government programs available to help people refinance, even when they’re upside down in the mortgage. In this article, I’ll explain some of the government refinancing help that is available for struggling homeowners.

First, a quick definition. When I talk about people being upside down in their mortgages, I mean that they owe more on the home than it’s worth in the current market. In other words, they have negative equity.

An Example of Being Upside Down

Let’s assume I purchased a home in 2006 for around $300,000. A couple of years later, the housing market tanked. If I lived in a city with a large real estate bubble, such as San Diego, my property value might have declined significantly. Let’s assume that is what happened to me. So when I get my home appraised, I find out that it’s only worth $220,000 in the current real estate market. I check my financial records and find out that I still owe about $270,000 on the home. This is what it means to be upside down in the mortgage loan. I owe more than my home is worth in the current economy. As a result, refinancing is probably not an option for me — not without government help, that is.

If this scenario sounds familiar, you are not alone. There are millions of upside down homeowners in the United States right now, mainly as a result of the housing crisis and subsequent recession we faced. In fact, I just read a report published by Deutsche Bank that said nearly half of all homeowners could be upside down in their mortgages by 2011. This also means that a lot of people are going to face additional refinancing obstacles, as a result of their negative equity.

Refinancing Help for Homeowners

In a “normal” economy, refinancing an upside down mortgage loan would be nearly impossible. But there are now some government refinance programs available to homeowners in this situation. Of course, there are plenty of stipulations as well. First and foremost, your current mortgage loan must be owned / backed by Freddie Mac of Fannie Mae. (Google “Fannie Mae loan lookup,” and then do the same for “Freddie Mac.”) Additionally, you can only be upside down by a certain percentage. You must also be current on your payments. If you meet these and other established guidelines, you could qualify for government refinancing help to escape from your negative-equity situation.

The current benchmark for upside down homeowners is 125%. This means that you may qualify for government refinancing help as long as your mortgage balance does not exceed 125% of your current home value. If you fall within this range, and you meet other established criteria, you may be able to refinance after all. If you would like to learn more about this program, you should visit the Making Home Affordable website. This is the official website set up by the government  to educate homeowners on their refinancing options. The website explains all of the eligibility parameters for the program, and it also provides instructions on how you can continue the process.

One thing I would like to point out is that you still need to apply for a mortgage refinance through a regular lender. Within the context of the government refinancing program, this means you would need to contact your current mortgage company or loan servicer (whomever you send your payments to). The government is providing incentives for the lending industry to modify and refinance loans, but the government does not actually make loans to the public. This is a point of confusion for a lot of homeowners, so I thought it was worth mentioning here. Just visit the website  I mentioned earlier — it has all the information you need.

You also need to realize that government refinancing help is not going to be available for everyone. There are certain situations where upside down homeowners simply cannot refinance. For example, if you have severely negative equity you probably won’t be able to refinance the home. You’ll also face additional obstacles if your mortgage loan is NOT owned by Freddie Mac or Fannie Mae. But you won’t know if refinancing is possible until you apply for the program, so that’s your first step.

So let’s summarize the key points covered thus far:

  • Millions of Americans are upside down and their mortgage loans right now. This is the direct result of our housing crisis and economic recession.
  • By the year 2011, nearly half of all homeowners could be in this situation.
  • When you have negative equity (i.e., you are upside down and alone), it can be nearly impossible to refinance your mortgage.
  • There are new programs offering government refinancing help for homeowners in this situation.
  • To find out if you are eligible for help, you should visit the Making Home Affordable website.
  • The government websites has a brief questionnaire to help you determine if you might be eligible.
  • If you “pass” this initial questionnaire, you will be given additional instructions for contacting your lender.

Share Your Story

Have you received refinancing help from this government program? Were you able to refinance even while being upside down in the loan? If so, we would love to hear from you. More importantly, there are literally millions of other homeowners who would love to hear from you! If you have had success, and you would like to offer some tips for other readers, leave your comments below. We will post them here for all to read.

Brandon Cornett

Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author