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Options When You're Upside Down on Your Mortgage

by Don Rafner, studioD

Most people count their homes as their biggest investments. That's why it's such a financial hit when homeowners owe more on their mortgage loans than what their homes are worth, a situation known as being underwater. Fortunately, owners who are underwriter have some options. But qualifying for help from mortgage lenders isn't always easy. Owners might have to first sustain a financial hardship -- such as a drop in their monthly income -- to qualify for relief.

Principal Reduction Alternative

The federal government's Principal Reduction Alternative provides financial incentives to lenders who agree to reduce the amount of money that upside down homeowners owe -- their principal balances -- on their mortgage loans. Not all homeowners can qualify for this program, though. Those whose mortgage loans are owned or guaranteed by Freddie Mac or Fannie Mae can't participate. Homeowners must also have taken out their loans on or before Jan. 1, 2009, and must owe no more than $729,750 on them. Homeowners must also prove that they have suffered a financial hardship and that they are either in danger of missing mortgage payments or have already missed them. The government says that more than 100 lenders are participating in the Principal Reduction Alternative. Homeowners need to call their mortgage lenders to see if they are participating.

FHA Short Refinance

The Federal Housing Administration offers its own program for homeowners who are underwater, the FHA Short Refinance. Under this program, homeowners who are paying off conventional mortgage loans -- those not insured by a government agency -- can refinance into a new mortgage loan insured by the FHA. Borrowers will receive lower interest rates but will also see their principal balances lowered. That's because lenders must agree to give borrowers a new loan with a balance that is no more than 97 percent of a home's current market value.

Home Affordable Refinance Program

By refinancing their mortgage loans, homeowners can dramatically reduce their monthly mortgage payments. That won't change the fact that these homeowners will still be underwater. But at least they'll be paying less each month for the privilege of living in a home that is worth less than what they owe. Unfortunately, most lenders won't approve refinance requests unless owners have at least 20 percent equity in their homes, something they won't have if they're underwater. The government, though, does offer its Home Affordable Refinance Program, which encourages lenders to refinance home loans of owners who have either no equity or negative equity. To participate in the program, homeowners must be paying down a mortgage owned or guaranteed by Freddie Mac or Fannie Mae. Borrowers must also be current on their mortgage payments and must not have missed a payment in the last 12 months. To participate in this program, homeowners can contact any mortgage lender -- not just the one to which they are sending their mortgage payments -- licensed to do business in their state.

In-House Help

In cases in which none of the government programs can help underwater homeowners, the homeowners can reach out directly to their mortgage lenders for financial relief. Lenders might agree to reduce a loan's interest rate or shrink its principal balance. They might adjust the terms of a loan -- maybe by changing a 15-year fixed-rate loan to a 30-year fixed-rate loan -- to leave a mortgage that comes with a lower payment. Most lenders, though, will only do this -- and some lenders will never do this -- if homeowners are struggling to make their mortgage payments. Homeowners will have to provide proof -- through copies of their paycheck stubs, credit-card bills or medical bills -- that they have sustained a financial crisis that makes it impossible for them to make their monthly payments.

About the Author

Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.