Refinancing a home when you have no equity is far from an easy task. Most mortgage lenders won't allow you to refinance a home for 100 percent of its value. Instead, they want you to have at least some equity built up. Fortunately, you do have some options for refinancing even if you have no equity.
The Equity Requirement
Most mortgage lenders will require that you have at least 20 percent equity built up in your home before they'll approve your request for a refinance. This can be a problem if you haven't owned your home for long enough to pay down a significant portion of your loan. It might also be a problem if your home's value has dropped since you purchased it. Depending upon how far your residence's value has sunk, you might not have any equity built up at all.
If you hope to convince your lender to approve a refinance for 100 percent of your home's market value, you'll have to prove to this lender that your finances are strong. You might have an outstanding credit score, 740 or higher on the popular FICO credit-scoring system. This means that you've had a history of paying your bills on time, something that makes you a more attractive borrower. Maybe you have a high gross monthly income, one that makes you less of a risk to default on your mortgage payments. You might have little to no revolving debt, another financial factor that makes you more attractive to lenders. Remember, too, that you don't have to work with your current lender when you are refinancing. You can shop around with any lender licensed to do business in your state. With enough phone calls, you might be able to find a lender that is impressed enough with your strong financial situation to grant you a 100 percent refinance.
Money To The Table
If you have enough savings, you can bring money to the closing table to create equity in your home. If your home is worth $100,000, and you bring $5,000 to the closing table, you'll have bought 5 percent equity. That's not 20 percent, but it might be enough to persuade some mortgage lenders to grant you a refinance. Remember, though, that refinances aren't free. You can expect to pay from 3 percent to 6 percent of your loan's balance in closing costs. Make sure that your interest rate drops enough to allow you to quickly pay back both your closing costs and the money you brought to the table.
You might also be able to refinance 100 percent of your home's value through the federal government's Home Affordable Refinance Program. Under this program, you can qualify for a refinance even if you owe as much as 125 percent of your home's market value on your mortgage loan. If your house is worth $100,000, you'll be able to refinance even if you owe as much as $125,000. To apply for a refinance through this program, you'll have to call your existing mortgage company. Unlike in traditional refinances, you are not allowed to work with any other lender.
- Federal Reserve Board: A Consumer's Guide to Refinancing
- Bankrate; Underwater Refinance Options; Marcia Passos Duffy; January 2010
- Making Home Affordable: Home Affordable Refinance Program
- PHH Mortgage. "Borrowing Basics: Home Equity Loans vs. Cash Out Refinancing." Accessed Dec. 17, 2019.
- Consumer Financial Protection Bureau. "What Is a Second Mortgage Loan or 'Junior-Lien'?" Accessed Dec. 17, 2019.
- Washington State Department of Financial Institutions. "Mortgage Refinancing Basics." Accessed Dec. 17, 2019.
- Discover. "Refinance 101." Accessed Dec. 17, 2019.
- FDIC. "State Housing Finance Agencies: First-Lien Mortgage Products." Accessed Dec. 2019.
- Citi. "The Refinance Application Process." Accessed Dec. 17, 2019.
- Discover. "Steps in the Home Equity Loan Application Process." Accessed Dec. 17, 2019.
Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.