Refinancing a Mortgage With Little or No Home Equity

The real estate market has cooled in some areas.

Homeowners who bought with a small down payment at the market's peak could face an issue when rates drop: not enough equity to refinance. In fact, some could be "underwater."

In other words, their loan balance is too high compared to the home’s value.

Is it possible to refinance with little or no home equity? In many cases, yes.

Low Equity Refinance Options

Conventional lenders have refinance options with as little as 3% equity.

With an FHA-backed refinance, that number drops to just 2.25%. And if you’re eligible for a VA loan, you can even get a cash-out refinance for up to 100% of your home’s appraised value (0% equity).

Plus, current FHA and VA loan holders who want to reduce their interest rate or change the length of their mortgage can apply for a streamline refinance. These "low doc" loans don't require an appraisal or credit check and have no equity requirements.

If you purchased or refinanced within the past couple of years and could benefit from current interest rates, here are five low equity refinance options worth looking at.

1. FHA Standard Refinance

*certain designated high-cost areas have higher loan limits

The FHA standard refinance is an excellent option for borrowers with lower credit. You can finance up to 97.75% of your home's value, and you don't need to currently have an FHA loan to qualify.

There’s no waiting period to be eligible for an FHA standard refinance. However, if you haven’t lived in your home for at least a year and don’t currently have an FHA loan, you’re only eligible to finance up to 85%.

Mortgage insurance premiums (MIPs) are required on all FHA loans. Still, interest rates for low-credit homeowners may be more attractive than with a conventional refinance.

2. FHA Streamline Refinance

*certain designated high-cost areas have higher loan limits

FHA streamline refinances are only available if you currently have an FHA mortgage. As a "low doc" loan, a streamline refinance doesn't require an appraisal. In many cases, you won't need a credit check or income verification either.

You are eligible for a streamline refinance once you’ve made six mortgage payments and at least 210 days have passed since closing on your current FHA loan.

Unlike other low equity refinance options, an FHA streamline doesn't allow you to wrap closing costs into your loan.

To qualify for an FHA streamline, refinancing must result in what the FHA considers a "net tangible benefit."

This means either:

• Reducing your interest rate (including any MIP reduction) by at least 0.5%, or

• Replacing your adjustable-rate mortgage with a fixed-rate mortgage in certain circumstances

Like with the FHA standard refinance, you’ll continue to pay a mortgage insurance premium. However, if you took out your existing loan less than three years ago, you should qualify to have a portion of your upfront MIP refunded.

3. VA Streamline Refinance (Interest Rate Reduction Refinance Loan)

The Department of Veterans Affairs offers a streamline refinance they call an Interest Rate Reduction Refinance Loan (IRRRL).

You must currently have a VA-backed mortgage to qualify. You're eligible for an IRRRL after you've made a minimum of six monthly payments on your current loan and at least 210 days have passed since the first payment.

Like with the FHA's streamline mortgage, VA IRRRLs are usually available without an appraisal or credit check. In contrast with the FHA program, however, the VA allows borrowers to wrap closing costs into their loans. You can also refinance to a shorter length, such as from a 30-year to a 15-year mortgage.

Most homeowners must pay a VA funding fee of 0.5% on their streamline refinance. However, unlike other low equity refinance options, VA mortgages have no maximum loan limit: the VA will guarantee refinance loans as large as you can qualify for.

4. VA Cash-Out Refinance

*VA guidelines set no required credit score or debt-to-income ratio. However, expect lenders to have their own standards.

Most cash-out refinance programs limit loans to 80% of your home's value. If you have little equity, getting a cash-out refinance is often not an option. However, homeowners eligible for a VA cash-out refinance can borrow up to 90-100% of their property's appraised value, depending on the lender.

Like their streamline program, getting a VA cash-out refinance requires waiting 210 days from your first mortgage payment. You must also have made at least six payments during that time.

As we've mentioned, VA mortgages have no maximum loan limit. However, most borrowers who qualify for a VA cash-out refinance will pay a funding fee of 3.3%.

5. Conventional 97% Refinance

*certain designated high-cost areas have higher loan limits

You can qualify for a conventional refinance with as little as 3% equity. But to be eligible to borrow up to 97% of your home's value, your current mortgage must be owned or securitized by Fannie Mae or Freddie Mac.

To determine who owns your loan, check out the Fannie Mae loan lookup and Freddie Mac loan lookup tools.

If your loan doesn’t qualify for the conventional 97% refinance, you can still refinance for up to 95% of your property’s value. Conventional borrowers with less than 20% equity can expect to pay for private mortgage insurance.

To be eligible for a conventional refinance, you must have had your current loan for at least 12 months.

HlRO, FMERR, and HARP Programs

In the past, other programs were available to help borrowers with very little or no equity refinance their mortgages. Fannie Mae High LTV Refinance Option (HlRO) and Freddie Mac Extended Relief Refinance (FMERR) mortgages were open to property owners with less than 3% equity. There were no loan-to-value limits on fixed-rate mortgages, so you could qualify even if you were underwater on your home.

These two programs ran from 2018 to 2021. They were temporarily paused in mid-2021 as rapidly rising home values had created equity and reduced loan demand.

Before those programs, the Home Affordable Refinance Program, or HARP dominated refinances. These allowed homeowners to refinance with no equity or even negative equity in the early 2010s.

If property values stagnate or decline in the future, agencies could once again allow homeowners with low equity to take advantage of falling interest rates.

Frequently Asked Questions About Low Equity Refinance Options

Are you looking for some quick answers? Here are a few of the most frequently asked questions about low equity refinance options.

Can You Refinance a Home With No Equity?

If you currently have an FHA or VA loan, you may be eligible for a streamline refinance. These mortgages don't require an appraisal and are available regardless of how little equity you have. If you don't qualify for a streamline refinance, FHA standard refinances are available with just 2.25% equity and conventional with as little as 3%.

Can You Refinance if Your Home Loses Value?

Depending on the size of your down payment and the value you've lost, you may still qualify for a conventional refinance. Both Fannie Mae and Freddie Mac allow refinances with as little as 3% equity. If demand increases, conventional lenders may begin to offer high LTV refinance options as they did from 2018 to 2021 or no-equity and negative-equity refinances like HARP in the early 2010s.

What Is the Minimum Equity for a Cash-Out Refinance?

For most conforming loans, you'll need at least 20% equity left over after your cash-out refinance. That means to receive any money at closing, you have to begin with more equity than that. However, homeowners eligible for a VA cash-out refinance can get a loan for up to 100% of their property's value.

Refinancing Your Mortgage With No Equity

If your home’s value has remained steady or decreased over the past couple of years, you might not have much equity. But that doesn’t mean you can’t refinance and take advantage of declining interest rates.

To find out which low equity refinance options you’re eligible for, check today’s refinance rates and get in touch with an experienced mortgage provider.