A home purchase is typically done for two reasons. First, a place to live and second, an investment. Like any investment, this purchase can sometimes go the wrong direction, leaving the homeowner struggling to meet the demands of a debt that is more than the asset is worth. When you find yourself in this situation you may realize that a refinance can help solve the problem you are dealing with. Unfortunately, too many homeowners think a refinance isn’t a possibility for them because there is no equity. But here is a thought you might want to entertain, ‘Can I still refinance my home with no equity?’ This thought may be the key to getting you into a mortgage you can manage.
HARP and HAMP
After the real estate market had plummeted a few years ago, the government implemented multiple programs to help people who lost equity and who ended up in a mortgage that was worth more than the house. These programs are specifically for people who had the mortgage before the crash, and they have been a source of relief for thousands of homeowners. The first of these programs is HARP, which stands for the Home Affordable Refinance Program. When you ask yourself ‘can I refinance my home with no equity?’ The answer is yes; they may be able to if you qualify for HARP.
The Home Affordable Refinance Program is specifically geared toward homeowners who do not have existing FHA mortgages. They also cannot be late on their payments or delinquent in any way. This program is for people who have managed to maintain their mortgage despite their underwater status. Through this option you can refinance, taking advantage of the low-interest rates available today. This will, in turn, reduce your mortgage payment and free up money to help you build equity.
The second program is HAMP, which is the Home Affordable Modification Program. This isn’t a refinance. Instead, it’s an option to modify your existing mortgage, making it more manageable for you. This program specifically targets homeowners who are delinquent or facing delinquency on their mortgage or those who can prove that they are in a financial hardship, and they won’t be able to maintain the mortgage with their current financial state. Again, it’s not a refinance but it’s an option that is worth considering.
Can I Refinance My Home and Reduce My Mortgage?
Through the programs implemented federally, there is a third option that can drop the amount of your mortgage. You can get a refinance that reduces the mortgage through federally approved lenders, and no the FHA doesn’t own the loan itself. It simply insures it. That being said, there is a program that has been implemented around the time the market dropped that will reduce your mortgage amount. This is the short refinance and it is available for the homeowners who were affected when the real estate bubble burst.
With the short refinance your lender agrees in writing to forgive part of your mortgage debt, dropping the amount to 97.5% of the value of the home. You can’t get the short option unless your lender agrees to it. Many lenders are willing to do this because they’d rather forgive part of the debt than deal with a short sale or foreclosure.
While the short refi is a great option for some homeowners, it’s not a perfect solution and it’s not a solution for everybody. It’s only available for those with conventional loans and you need to be current on your payments for that loan. In addition to this, because it is a mix between a short sale and a refinance, it will be reflected on your credit report. It won’t have quite the impact that you would experience with a foreclosure or bankruptcy, but regardless it will be listed and your score will feel the effects of that. However, when the option is to reduce your credit score a bit or potentially lose your home, it’s worth it to deal with the impact on your credit.
When you are in a situation with a mortgage that is underwater or has no equity, there are programs that you can take advantage of. The three mentioned above are those specifically geared for people who were impacted when the bubble burst, and they are set to expire within the next couple of years. If you want to take advantage of them, now is the time to speak with your loan officer and see what can be done for you.