How to Refinance With No Equity Options

Refinancing allows debtors to take advantage of lower interest rates or to change other key terms in a real estate mortgage. However, refinancing without equity in real estate such as a primary residence leaves few options for a successful transaction. The lack of equity could make refinancing impossible. Lenders determine equity by subtracting the fair market value of real estate from the balance on the loan. For example, a homeowner with an $80,000 mortgage and a house valued at $120,000 has $40,000 in equity. However, some owners owe more on real estate than it is worth because of declining property values after a recession or housing crisis.

Instructions

1

Ask a real estate to estimate the fair market value of your property by comparing your home to others recently sold in your neighborhood, or hire a licensed home appraiser to appraise the property. Get referrals for an appraiser from real estate agents and others working in real estate, such as builders.

2

Compare the fair market value against the balance on the loan. Real estate worth less than the balance has negative equity---a consideration that you must address during the refinancing.

3

Check your credit report and score. A refinancing is impossible without proper credit qualifications. Ideally, your credit score must be 720 or higher, although refinancing is sometimes possible with lower scores. Review your credit report after obtaining it from AnnualCreditReport.com. The site offers free reports under the terms of the Fair Credit Reporting Act. Credit reports are available for free from major credit bureaus Experian, Equifax and TransUnion. View and print all three reports to check for errors. Dispute errors by sending written correspondence to the credit bureaus. Follow instructions on the credit reports for sending the disputes or choosing alternative options such as filing disputes by telephone or online.

4

Meet with a housing counselor certified by the U.S. government if your loan is for your primary residence. Counselors approved by the U.S. Department of Housing and Urban Development are experts in home loan modification, including situations in which the owner lacks equity in the property. Get a referral for a counselor in your area by contacting a local charity such as a local chapter of the National Urban League or the United Way. Discuss your equity and credit situation with the counselor to determine your best options for refinancing the loan.

5

Refinance with no equity in your property by making a lump sum payment to create equity, if necessary. Lenders typically require borrowers to have 20 percent equity in their property to qualify for refinancing. That means you must pay the balance down by $20,000 if your property is worth $100,00 and you owe $100,000 on the mortgage.

6

Apply for other programs if paying down the balance to create equity is not an option. Ask the counselor about government-supported loan modification programs that allow for refinancing even when the owner owes more on the property than it is worth. Some lenders may also allow 125 percent financing on property, which allows for refinancing when the owner lacks equity.