Underwater Homeowners and Refinancing

July 13, 2021

You'd love to refinance your mortgage. You've seen that the average interest rates on 30-year and 15-year fixed-rate mortgage loans are still at near-historic lows. You know that you could save more than $1,000 a year by refinancing to a mortgage that comes with a lower interest rate.

There's just one problem: You are underwater on your mortgage. You owe more on your home than what your residence is worth, an unfortunate byproduct of the drop in housing values that started in late 2006 and early 2007. Most conventional mortgage lenders will not grant you a refinance if you have negative equity.

Don't give up hope, however. You might, thanks to government programs, be able to refinance your home loan even if you are underwater.

The Challenge

Most mortgage lenders require that you have at least 20 percent equity in your home before they will approve you for a mortgage refinance. In other words, if your home is worth $200,000, lenders want you to have a mortgage that is at least $40,000 less than that $200,000 figure.

If you have a mortgage of $250,000 on a house that is now worth $200,000 thanks to falling home prices, you obviously lack the 20 percent equity that lenders want.

What do you do? It is time to turn to the government for help.


The government currently offers its Home Affordable Refinance Program, better known by the acronym HARP, to homeowners who have little or negative equity in their homes. This program provides financial incentives to lenders that agree to refinance the mortgages of homeowners who lack the traditional 20 percent of equity.

The goal of HARP is simple: The government wants to provide underwater homeowners with the chance to enjoy the low interest rates that are making owning a home more affordable today.

In August 2017, the Federal Housing Finance Agency announced that they were extending the HARP program through the 2018 calendar year.

To start the HARP process, you must call your current mortgage company. Unlike a traditional mortgage refinancing, HARP only allows you to work with your existing lender. Don't call the government, either. While the federal government sponsors HARP, it is private mortgage lenders that run the program and decide whether you qualify or don't qualify for a refinance.

The Process

When you call your lender, you will need to tell an account representative that you are underwater on your mortgage and that you would like to refinance through the HARP program. Your lender will have to make sure that you meet specific program requirements. Participation in the program requires that you be paying off a Fannie Mae or Freddie Mac owned or guaranteed mortgage. You must be current on your mortgage payments at the time of your refinance request, and you must not have missed any payments in the last 12 months.

Once your lender determines that you qualify for the program, it will then proceed as if you were requesting a standard mortgage refinance. You will have to provide your lender with copies of financial documents that your lender can use to verify your income and debts. That could include your two most recent work pay stubs, your last two months’ worth of bank statements and last two years’ worth of income tax returns. Your lender might also request copies of your most recent credit card statements, student loan bills, car payment stubs and retirement savings account statements.

Your lender will also run your credit. That is important; you will need a high three-digit credit score to qualify for an interest rate low enough to make refinancing financially worthwhile. Remember, refinancing is not free. You can expect to pay from 3 percent to 6 percent of your outstanding loan balance in closing fees and settlement costs. You will need to obtain an interest rate that is low enough to generate enough savings each month to allow you to recoup those refinancing costs promptly.

In general, mortgage lenders reserve their lowest interest rates for those borrowers who boast three-digit credit scores of 740 or higher on the commonly used FICO credit-scoring scale. Remember, the higher your credit score, the lower your interest rate will be. If you want to qualify for today's historically low rates, you will need that credit score of 740 or higher.

If your finances are healthy, and your credit score high, the odds are good that your lender will approve your mortgage, even if you are underwater. You just have to make sure that you qualify for the government's HARP program.

© Fintactix, LLC 2021

Products & Services


Flexible, convenient and styled to suit your life and financial needs, our personal checking solutions are built around you.


Whether you’re just starting out or getting ready for retirement, our range of savings solutions help prepare you for whatever’s next.


With a personal loan from Investors, you can consolidate high interest credit card debt, make a large purchase, start on some renovations or take a much-needed vacation, it’s totally up to you!

Investments & planning

Today’s financial landscape can be complex and overwhelming, but with personalized guidance and smart investment options from Investors Financial, you’ll be ready for what’s next.