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Refinancing When You Have Little Home Equity

Posted by  on Sep 28, 2010
 

The housing crunch may have left you with little or no equity in your home. If you want to refinance, you maybe concerned that you won't be approved by a mortgage lender. Refinancing a mortgage may seem impossible but there are a few things you can do to improve your chances.

How Much Equity Do You Have?

Home prices have fallen so much that many homeowners would barely break even if they sold their homes. When refinancing with less than 20% home equity, you have to buy mortgage insurance (MI). MI protects the mortgage lender if you default on your home loan.

Underwater Mortgages -- HARP

About 11 million mortgages are underwater in the U.S., and some housing experts say that number could increase significantly this year. Having an underwater mortgage will keep you from refinancing with most mortgage lenders. But if you otherwise qualify and have a mortgage with Fannie Mae or Freddie Mac, you could qualify to refinance under the Home Affordable Refinance Program (HARP) with a lender of your choice.

You must provide appropriate documentation to qualify for a refinance under the HAMP program and it's important to get paperwork to the mortgage lender as soon as possible. Those documents usually include:

  • Recent pay stubs
  • Your last income tax return
  • Documentation of a second lien
  • Credit card balances and payment information
  • Balances and payment information for any other debts, such as a car loan

Cash-In Refinancing

A refinance might be approved if you bring cash to closing. You would need enough cash to boost the amount of equity in your home to a level acceptable to your lender. Doing a cash-in refinance could be worth the cost if you can take advantage of current mortgage rates to significantly lower your monthly payment.

HAMP

While the government's Home Affordable Modification Program (HAMP) hasn't helped as many homeowners as originally anticipated, there's still a chance it could help you. The program allows qualified borrowers experiencing hardship to get the terms of their mortgages modified to a more affordable level.

Get Help with Mortgage

A knowledgeable housing counselor can explain options for refinancing. If you can't get a mortgage lender to approve a home refinance, you may have to consider other alternatives to get out of a mortgage you are having trouble paying. Those alternatives might include a short sale (Home Affordable Foreclosure Alternative, or HAFA) in which your lender agrees to accept less than you owe on the mortgage. Foreclosure and bankruptcy are other ways to get out from under a troubled loan, but these options should be avoided if at all possible so that you don't ruin your credit rating.

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