When you owe more on your home than your property is worth, you have an underwater mortgage (also known as having negative equity in your home). That’s a difficult position to be in: If you sell your home, you don’t receive funds, and you may need to pay a substantial amount to your lender at closing. Plus, it’s hard to refinance when your loan balance is higher than your home’s property value.

How does this happen? You may have negative equity if your home price falls before you pay off a significant portion of your loan. Borrowing against a home with a second mortgage can also add to your total debt, narrowing the gap between what you own and what you owe.

If you’re having trouble refinancing because of an underwater mortgage, you have several solutions, including government programs, temporary relief, and options that allow you to sell your home.

An Easy Test to See If Your Mortgage Is Underwater

A loan-to-value (LTV) ratio measures how much equity you have in your home. If that number is above 100%, your loan balance exceeds your home’s market value. To calculate a loan-to-value ratio, divide the loan value by the assessed property value. For example, if your loan balance is $150,000 and your home is worth $300,000, your loan-to-value ratio is 50%. But if you owe $315,000 on your $300,000 house, your LTV is 105% and you’re underwater.

Refinancing Options

In some cases, you can refinance, swapping out your existing loan for a better one. If rates on new mortgages are low, or if you can improve other aspects of your loan, you may come out ahead by doing so. Evaluate the details, including a breakeven point and the total amount you’ll spend on your new loan, before moving forward.

We’ll start with options that may make sense if you’re on relatively solid financial ground (you’re current on your payments, and you might even have extra cash available). Later, we’ll cover solutions for borrowers in distress.

FHA Streamline

If you already have an FHA loan, you may be able to refinance a negative equity mortgage through FHA’s Streamline Refinance program.1 You do not need an appraisal when using that program (and in some cases, you may not even need a credit check), so your current property value would not affect your ability to refinance. As a bonus, skipping the appraisal means you don’t need to pay an appraisal fee, which makes refinancing more affordable.

Fannie Mae High LTV Refinance Option

If your loan is with Fannie Mae, you may be able to use the High LTV Refinance program to get a better loan. Fannie Mae requires that the new loan improve your circumstances with features like a lower rate, a lower payment, or a shorter repayment term. Use the lookup tool to find out if Fannie Mae has your loan.

Freddie Mac Enhanced Relief Refinance

Freddie Mac also offers relief for loans that exceed the ideal loan-to-value ratio. The Enhanced Relief Refinance program requires that Freddie Mac owns your loan, and you must also switch to a better loan that has a lower rate or other borrower-friendly features. Freddie Mac’s lookup tool can help you determine if you qualify.

Pay Down and Refinance

If you’re determined to refinance and you have the resources, you can also pay down your mortgage balance until you qualify for a loan. Unfortunately, that isn’t feasible for most people. If you decide to pay down your balance, it’s best to have a loan-to-value ratio of 80% or lower to minimize interest costs and avoid paying for mortgage insurance.2 To do this, you typically need to make a lump-sum payment with your current lender and get a new loan. Discuss the logistics with your lender to make sure the process goes smoothly.

Other Options for Relief

If the solutions above aren’t a perfect fit for you, you may have other options available. You might not be able to refinance immediately, but you can try to minimize the damage to your finances until you’re back on your feet.

CARES Act Relief

The Coronavirus Aid, Relief, and Security Act (the CARES Act) offers several benefits to borrowers with federally-backed loans, including:3

• Temporary forbearance (or pause) of mortgage payments for up to 15 months if your mortgage is backed by Fannie Mae or Freddie Mac and up to 18 months if your mortgage is backed by the FHA, USDA, or VA with no added fees or interest4
• No evictions or foreclosures until June 30, 20215
• No need to document your hardship
• No damage to your credit, if you meet the criteria

Contact your lender immediately if you’d like to take advantage of those provisions. You may be able to submit a request for forbearance online. Otherwise, be prepared for long hold times if you call.

See our guide for complete details on mortgage relief during the global health crisis.

Other Relief Options

New programs for rescue options may be available, and existing programs may have additional benefits not listed here.

If you’re having trouble with mortgage payments, the best course of action is to speak with your current lender and describe your circumstances. They may be able to work with you in a variety of ways.

• Loan modification: With a loan modification, you may be able to get a lower interest rate, a lower monthly payment, or a temporary break in payments. 
• Short sale: With your lender’s permission, you may be able to sell your home for less than you owe. In some cases, you may still owe any unpaid balance, so it’s critical to review the details before you move forward with this strategy. Ask your lender if it’s possible to avoid liability for the loan, and get any promises in writing. 
• Deed-in-lieu of foreclosure: You may be able to transfer ownership of your property (or “hand over the keys”) to your lender through a deed-in-lieu (DIL) transaction.6 Again, you may still owe money after the fact.
• Other options: Your lender may have options not listed here. You never know what’s available until you ask, and programs continue to evolve.

Wait It Out?

For some homeowners, it may make sense to just wait before trying to refinance. Over time, your property value could increase, making your loan-to-value ratio more attractive to lenders. Plus, as negative items age or fall off your credit report (and you make on-time payments on current debts), your credit scores should improve. 

With a higher property value and strong credit, you may be able to qualify for attractive rates in the future. That doesn’t necessarily make things easier for you today, but it’s important to remember that options may open up for you down the road, and rates might not necessarily rise quickly.