Yes, you can refinance an underwater mortgage in 2025, depending on your loan type, credit, and lender. Options for refinancing an underwater mortgage include FHA Streamline Refinance, VA IRRRL, and high LTV programs from Fannie Mae or Freddie Mac. Private lenders may also offer solutions. This guide explains eligibility, compares programs, and offers actionable tips to help homeowners explore the best refinancing path based on their situation.
What Does “Underwater Mortgage” Mean?
A mortgage is considered underwater when your loan balance exceeds your home’s current market value. This is also known as being “upside-down” on your mortgage.
Example:
- Current mortgage balance: $310,000
- Appraised home value: $260,000
- Negative equity: -$50,000
In this case, you’d owe $50,000 more than your home is worth. This can be stressful and often limits your financial options — especially if you want to refinance, sell, or move.
Why Do Homeowners End Up Underwater?
Several scenarios can cause homeowners to end up with negative equity:
- Falling home prices due to market corrections or regional economic shifts
- Buying with low down payments, leaving minimal equity from the start
- Adjustable-rate mortgages (ARMs) that reset to higher interest rates
- Economic crises or personal financial hardships that impact payments or value
Can You Refinance an Underwater Mortgage in 2025?
Yes, refinancing is possible even if you’re underwater — especially with government-backed loan programs. The key is understanding your options based on loan type and personal financial situation.
What You Need to Qualify:
Requirement |
Needed for Refinance |
| Consistent on-time payments | ✔️ |
| Government-backed loan (FHA, VA) | ✔️ |
| Stable income | ✔️ |
| Decent credit score (580–620 min) | ✔️ (varies by lender) |
| Loan backed by Fannie Mae/Freddie Mac | ✔️ (for some programs) |
Refinance Programs Available in 2025
1. FHA Streamline Refinance
If you have an FHA loan, this is one of the easiest and most forgiving refinance programs available.
Key Benefits:
- No home appraisal required
- No income verification in many cases
- Lower interest rates possible
- Quick processing (as little as 30 days)
Requirements:
- Existing FHA-insured mortgage
- Current on your loan (no late payments in past 6 months)
- Demonstrated benefit (e.g., lower monthly payment or interest rate)
More on FHA Streamline Refinance
VA Interest Rate Reduction Refinance Loan (IRRRL)
For active-duty military, veterans, and eligible surviving spouses, the VA IRRRL is a powerful option.
Highlights:
- No appraisal or credit underwriting
- Fast and simplified process
- Can switch from an ARM to a fixed-rate mortgage
- Potentially lower monthly payments
Requirements:
- Existing VA loan
- Timely payments for the last 6 months
- Cannot receive cash-out from the refinance
Learn more about VA IRRRL
3. Freddie Mac Enhanced Relief Refinance® and Fannie Mae High LTV Refinance Option
These programs are designed for homeowners who have high loan-to-value ratios and may not qualify for traditional refinancing.
Program Details:
- No minimum equity requirement
- Must be current on mortgage payments
- Loan must be owned by Fannie Mae or Freddie Mac
Eligibility Tools:
- Freddie Mac Loan Lookup
- Fannie Mae Loan Lookup
4. Private Lender and Portfolio Refinance Options
Some private lenders offer portfolio refinancing — custom options held in-house rather than sold on the secondary market. These are often more flexible but may have stricter underwriting and higher rates.
What to Know:
- Higher interest rates may apply
- Requires strong credit and income
- Best suited for investors with multiple properties or unique situations
Visualizing the Impact: Example Scenario
Let’s see how refinancing helps:
Before Refinance:
- Mortgage: $300,000
- Rate: 7.5%
- Monthly Payment: $2,098
- Home Value: $260,000 (underwater by $40,000)
After FHA Streamline Refinance:
- New Rate: 6.0%
- New Monthly Payment: $1,799
- Monthly Savings: $299
- Yearly Savings: $3,588
- 5-Year Savings: $17,940+
Even with no change in home value, refinancing reduces monthly strain and long-term interest paid.
What If You Can’t Refinance?
If refinancing isn’t currently an option due to credit issues, recent missed payments, or income instability, consider the following strategies:
1. Loan Modification
Negotiate new terms with your current lender. This may include:
- Reducing your interest rate
- Extending loan term to lower monthly payments
- Capitalizing missed payments into the balance
2. Forbearance or Deferment
Temporarily pause or reduce your mortgage payments if you’re experiencing financial hardship.
3. Short Sale or Deed-in-Lieu
If your situation is dire, you may be able to:
- Short Sale: Sell your home for less than what you owe
- Deed-in-Lieu: Voluntarily transfer the property to the lender
Warning: These options significantly affect your credit and should be used as last resorts. Speak with a HUD-certified housing counselor before taking action.
Find a HUD Housing Counselor
Tools to Help You Make the Right Move
Use these free tools and calculators to estimate your savings or determine eligibility:
- ✅ FHA Refinance Calculator
- ✅ VA Loan IRRRL Estimator
- ✅ Fannie Mae/Freddie Mac Loan Lookups
Related Reading
- What Happens If You Walk Away From Your Mortgage?
- How to Use Home Equity Responsibly When You Have Bad Credit
- Best Lenders for Home Equity Loans With Bad Credit in 2025