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How can you refinance an underwater mortgage?

November 9, 2012: 6:30 AM ET

I am trying to find a program that will help me refinance my home loan. I owe more than the house is worth. I have never been late on a payment and my credit score is really good. My current rate is 8% and no one will seem to refinance it for me. Is there any hope? — Jeff D.

Step one is to figure out what type of loan you have, says Marsha O'Hare, a financial service specialist and HUD-certified housing counselor at Apprisen, a Columbus, Ohio-based credit counseling organization. If the loan is owned or guaranteed by Freddie Mac or Fannie Mae, you may be eligible for the government's Home Affordable Refinancing Program (HARP). "It allows someone who is not delinquent in their payments to refinance, even if the house is worth less than the loan," says O'Hare. You can find more information about HARP at

Another option, she says, is a Federal Housing Administration (FHA) Short Refinance. This program is extended to homeowners who are not behind on payments, owe more than their home is worth, and whose loans are not covered by Fannie Mae, Freddie Mac or FHA. A key part of the program is that lenders must agree to reduce the principal of the loan, so contact your mortgage provider to see if you are eligible. Read more about the FHA Short Refinance program at

If these options don't work, O'Hare suggests meeting with a certified housing counselor to work through the specifics of the loan and figure out what might work best for your financial situation. The U.S. Department of Housing provides a list of counselors listed by state at

— Austin Kilham

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