How to Refinance With No Equity in Your Home

Is it possible to refinance with no equity in the current economy? For some people, yes. For others, no. More than anything, it depends on who owns the mortgage. Homeowners in certain situations can refinance their homes with little or no equity, but it’s not available to everyone. I’ll cover those guidelines in just a moment. But first, I want to share a question and concern somebody emailed to me recently…

“My home’s value has declined over the last couple of years, because of the economic problems we’re having. As a result, I have very little equity in my home right now. I want to refinance to get a lower interest rate on my mortgage, but I’ve been told I won’t be able to do this because of my situation. Is there any way to refinance with no equity these days?”

Refinancing With Low Equity

This is a common question among homeowners right now,  and it will only become more common over the coming months. Like the person above, many homeowners have seen their property values drop like a rock over the last year or so. As a result, a lot of people have less equity than they did when they purchased the home.

How many people are in this boat? A lot! I saw a statistic recently that said more than 12 million homeowners are actually upside down in their mortgage loans right now, which means they owe more on the home than it’s worth in the current economy. This creates a lot of problems for people who are trying to refinance their mortgage loans, because equity is one of the qualifications for refinancing the loan.

Most lenders will require you to have a certain amount of equity (or ownership) in the home, before they will approve you for a refinance loan. So in the past, my default answer would have been, “No, it’s usually not possible to refinance with no equity or very little equity.”

But a lot has changed over the last couple of years, and there are new programs available for people in this kind of situation. These days, people in certain scenarios can refinance their mortgage loans even with little or no equity in the home. As you can imagine, there are plenty of guidelines and restrictions to go with that last statement. So let’s talk about the options that are available these days, and what it takes to qualify for them.

Government-Backed Refinance Programs

You want to know if you can refinance with no equity in your home. So where do you go? Who do you call first? What steps do you take? Well, you should start by finding out if your loan is owned or guaranteed by Fannie or Freddie.

Why? Because if your mortgage is currently owned by Freddie Mac or Fannie Mae (and the loan does not equal more than 125% of your current home value), then you could qualify for a refinance under a new government program. You can learn more about this program by visiting MakingHomeAffordable.gov.

Let me clarify the two key criteria for this program, which I touched on above:

1. The first requirement is that your mortgage must be owned by Fannie Mae or Freddie Mac. You can look this up online, if you’re not sure where you stand.
2. The second requirement is that your first mortgage balance cannot exceed 125% of the home’s value. So if you owe $253,000 on your first mortgage, and your home is only worth $250,000,  you could still qualify. Based on these hypothetical numbers, you would have no equity in the home (in fact you have negative equity). But you would not be upside down by more than 25%, so you could still qualify for a refinance under the program.

That’s the good news. Now for the bad news.

As I mentioned earlier, this government-backed refinancing program is only for mortgages that are owned by Freddie Mac or Fannie Mae. For everyone else, you’ll encounter more obstacles when trying to refinance with no equity in your home. Without using some kind of government program, like the one we just talked about, you’re probably going to need at least 10% equity to refinance your home. That number is not set in stone, and some lenders will allow you to refinance with less equity than that, but it is a general guideline.

Of course, it never hurts to speak to a lender and see what they can do for you. This is really the only way to find out if you can refinance your home with no equity, or with low equity. They might tell you “sorry, no chance.” Or they might be able to work something out. You won’t know until you try.

Did You Refinance with No Equity in Your Home?

If you were able to successfully refinance your home without any equity, we would love to hear from you. More importantly, other homeowners in the same situation would love to hear from you. You can share your story anonymously just by leaving a comment below. We will not share your email address with anyone, and you can use a fake name if you want. I’m just trying to encourage homeowners to help others who are going through the same thing.