Refinancing an Underwater Mortgage: Your Options

You owe $450,000. Your home is worth $400,000. You're $50,000 underwater.

Can you refinance? Sometimes yes, but options are limited.

What Does "Underwater" Mean?

Underwater (or "upside down") = you owe more than your home is worth.

Example:

• Mortgage balance: $380,000
• Home value: $350,000
• Negative equity: $30,000

LTV (loan-to-value) = $380,000 ÷ $350,000 = 108.5%

Anything over 100% LTV = underwater.

Check current refinance programs →

Why Most Lenders Won't Refinance Underwater Loans

Lenders need equity as a cushion.

If you default, they foreclose and sell the property. If you're underwater, the sale won't cover the loan balance. The lender loses money.

Conventional refinance max LTV: 97% (must have at least 3% equity)

FHA refinance max LTV: 97.75% (must have at least 2.25% equity)

If you're at 105% LTV, no standard refinance program will approve you.

Government Refinance Programs for Underwater Mortgages

Program 1: FHA Streamline (If You Have FHA)

Max LTV: No limit (you can be underwater)

Requirements:

• Current loan must be FHA
• Must have made 6 months of payments
• New payment must be lower OR switching ARM to fixed
• No cash-out allowed

This is the easiest path if you have an FHA loan.

Example:

• Current FHA loan: $380,000 at 7.5%
• Home value: $350,000 (108.5% LTV)
• Refinance to: 6.5% via FHA Streamline
• Approved (no appraisal, LTV doesn't matter)

See our FHA Streamline guide.

Broker's Tip: FHA Streamline is the ONLY mainstream program that allows underwater refinances. If you have FHA, use it. If you don't, your options are limited.

Program 2: VA IRRRL (Veterans Only)

Max LTV: No limit (you can be underwater)

Requirements:

• Current loan must be VA
• Must be a veteran
• New payment must be lower OR switching ARM to fixed
• No cash-out allowed

Same as FHA Streamline but for veterans.

If you have a VA loan and you're underwater, this is your best option.

See our VA IRRRL guide.

Program 3: HARP 2.0 (Expired, But Check If You Qualify)

HARP (Home Affordable Refinance Program) ended December 31, 2018.

BUT: If your loan was originated BEFORE May 31, 2009 and is owned by Fannie Mae or Freddie Mac, you might still qualify for similar programs.

Check if your loan is Fannie/Freddie:

• Fannie Mae Loan Lookup
• Freddie Mac Loan Lookup

If yes, contact your lender. They may have a "high-LTV refinance" option.

Lender-Specific Underwater Refinance Options

Some lenders offer in-house programs for underwater borrowers (usually their own customers only).

Examples:

• Wells Fargo: High-LTV refinance for existing customers
• Bank of America: Underwater refinance pilot program
• Chase: Portfolio loan refinance (case-by-case)

Requirements:

• You must be current on payments (no lates in past 12 months)
• Loan must be with that lender already
• Rates are typically 0.5-1% higher than standard refi rates

Call your current lender and ask: "Do you have a high-LTV or underwater refinance program?"

Loan Modification (Alternative to Refinancing)

If you can't refinance because you're underwater, consider a loan modification.

Loan modification = your lender changes your existing loan terms (rate, term, payment) without replacing the loan.

Pros:

• No appraisal (LTV doesn't matter)
• No closing costs
• Can lower your payment significantly

Cons:

• Only available if you're facing hardship (job loss, medical bills, etc.)
• Damages your credit (shows as "modified" on your report)
• Not all lenders offer modifications

See our loan modification guide.

Bringing Cash to Close (Not Recommended)

You could pay down your balance to get above water.

Example:

• Owe: $380,000
• Home value: $350,000
• Need 3% equity for FHA refinance: $350,000 × 0.97 = $339,500
• You'd need to pay down $40,500 to qualify

Is this smart? Rarely. You're throwing $40,000+ at a refinance to save maybe $150/month. Break-even would be 20+ years.

Only do this if:

• You're staying in the home forever
• You have cash sitting idle
• The rate drop is massive (2%+)

Short Refinance (Rare, Lender Must Agree)

A "short refinance" is when your lender agrees to forgive part of your loan balance to help you refinance.

Example:

• You owe: $380,000
• Home value: $350,000
• Lender agrees to a short refinance: they reduce your balance to $340,000
• You refinance the $340,000 at current rates

Why would a lender do this? To avoid foreclosure. If you're struggling to pay and at risk of default, they'd rather reduce the balance and keep you paying than foreclose and lose more money.

Requirements:

• You must prove financial hardship
• Lender must agree (not common)
• May have tax implications (forgiven debt is taxable income)

This is a Hail Mary option. Don't count on it.

Wait for Home Values to Recover

If you're underwater but not in financial distress, the best strategy is often to wait.

Home values trend up over time. If you bought at the peak, values might recover in 2-5 years.

Example:

• 2023: Bought for $450,000 (100% LTV)
• 2026: Home value dropped to $400,000 (you're $50,000 underwater)
• 2028: Home value recovers to $460,000 (you have equity again)

In the meantime:

• Make extra principal payments (reduces your balance)
• Improve the property (can increase value)
• Refinance when you're back above water

Frequently Asked Questions

Q: Can I do a cash-out refinance if I'm underwater?

No. Cash-out refinances require equity. If you're underwater, you have negative equity.

Q: What if I'm only slightly underwater (101-105% LTV)?

Try FHA Streamline or VA IRRRL (if you have those loans). They're your only realistic options.

Q: Will my lender work with me if I'm underwater?

Maybe. Call and ask about:

• High-LTV refinance programs
• Loan modification
• Short refinance

Q: Can I walk away from an underwater mortgage?

Walking away (strategic default) destroys your credit for 7 years and you might still owe the difference (if your state allows deficiency judgments).

Only do this as a last resort. Consult a real estate attorney first.

Q: Should I just sell and take the loss?

If you sell for less than you owe, it's a "short sale." The lender must approve. Your credit takes a hit (similar to foreclosure). But it's better than foreclosure.

Only consider if you can't afford the payments.

Next Steps

Check if you qualify for an underwater refinance program:

Get your free quote →

I'm a California licensed mortgage broker with 15+ years experience (DRE #01212512). I'll review your loan and tell you which programs you qualify for.

Related guides:

• FHA Streamline Refinance
• VA IRRRL Guide
• Refinance vs Loan Modification
• Current Refinance Rates