Can You Refinance with Negative Equity in 2026?

Refinancing can help homeowners lower their rate, reduce monthly payments, or switch loan types — but what if you owe more on your mortgage than your home is worth? This situation, known as negative equity or being “underwater”, makes refinancing challenging.

Short answer:

Refinancing with negative equity is still possible in 2026 — but only in limited scenarios. Traditional, conventional, FHA, and jumbo refinances generally do not allow negative equity. However, certain VA streamline refinances and FHA streamline refinances may allow underwater refinances because they don’t require an appraisal.

This guide explains what negative equity is, which refinance programs allow underwater borrowers to refinance, what alternatives you have if you can’t refinance yet, and how to benchmark any refinance offer you receive.

Key Takeaways

• Negative equity means your home value is less than your mortgage balance

• Most traditional lenders will not refinance loans with negative equity

• FHA and VA streamline refinances may allow underwater borrowers because they don’t require an appraisal

• Jumbo and conventional refinances cannot be done with negative equity

• Alternatives include recasting, loan modification, lender negotiation, or waiting for value recovery

💡 Pro Tip: Even streamline program pricing can vary significantly between lenders. Apply with a single lender and get your Loan Estimate. Use this as your negotiating tool as you talk to other lenders and get more offers.

What Is Negative Equity?

Negative home equity occurs when:

Loan Balance > Home Value

Example:

Home value: $350,000

Loan balance: $380,000

Equity: –$30,000 (underwater)

This can happen due to:

• Rapid home price declines

• High initial loan balance

• Low-down-payment loans

• Market slowdowns

• Local economic shifts

When you have negative equity, lenders see increased risk, which is why most refinancing programs don't allow it.

When Can You Refinance With Negative Equity?

There are only a couple of specific programs that allow negative equity refinances.

1. VA IRRRL (Streamline Refinance)

For eligible veterans with an existing VA loan, the IRRRL is the most accommodating program available.

VA IRRRL Features:

• No appraisal required

• No equity requirement

• No income verification in many cases

• Minimal documentation

• Can be done even if heavily underwater

As long as you are refinancing an existing VA loan into a new VA loan with a lower rate or payment, underwater equity may not be a problem, but this varies by lender. Every lender has different overlays, which means some may require an appraisal or a minimum equity level.

2. FHA Streamline Refinance

If you have an FHA loan, the FHA streamline refinance may allow you to refinance even with negative equity.

Why it works:

• Some lenders do not require an appraisal

• No income verification in some cases

• Less paperwork than traditional refinances

If the lender does not require an appraisal, your underwater equity is irrelevant and may allow you to qualify to refinance.

💡 Pro Tip: Don’t assume the first offer you receive is the best offer. Being underwater puts you in a vulnerable position, but that doesn’t mean you should overpay. Upload your Loan Estimate to Fincast. It takes 2 minutes, and you’ll be able to make choices with confidence based on transparency.

Refinance Programs That DO NOT Allow Negative Equity

The following programs require positive equity (or at least break-even LTV):

1. Conventional (Fannie Mae/Freddie Mac)

Conventional loans are non-government-backed loans with strict qualifying requirements, including an appraisal and positive equity. Negative-equity refinances are not allowed.

2. FHA Cash-Out or Rate-and-Term (with appraisal)

If an appraisal is required, underwater borrowers will not qualify for FHA loans because the appraised value would not support the required loan-to-value ratio.

3. Jumbo Loans

Jumbo loans have high equity requirements, which means negative equity automatically disqualifies you.

4. USDA Refinances

While USDA loans have somewhat more flexible guidelines, they generally require neutral or positive equity. USDA options are limited and lender-specific.

Why Most Lenders Don’t Allow Negative Equity Refinances

Negative equity increases risk for lenders, including:

• Higher chance of default

• Insufficient collateral

• Difficulty recovering losses in foreclosure

This is why only certain streamlined government-backed programs allow it.

How to Refinance While Underwater (If Eligible)

1. FHA Streamline

If you currently have an FHA loan:

• Apply for an FHA streamline refinance

• Choose a lender that offers no-appraisal streamlines

• Ensure your payment history is strong

• Many FHA streamline refinances do not require an appraisal, but lenders may still impose one.

2. VA IRRRL

If you currently have a VA loan:

• Apply for a VA IRRRL

• Choose a lender that offers no-appraisal streamlines

• Keep your payment history in good standing

• VA IRRRLs must generally provide a net tangible benefit, such as a lower rate or lower monthly payment.

💡 Pro Tip: Government-backed loans often have favorable pricing, but don’t assume the offer you get is the most competitive. Compare your options before locking a rate to ensure you get the most out of your refinance.

Alternatives If You Can’t Refinance With Negative Equity

If you can’t refinance yet, you still have options.

1. Recast Your Mortgage

If your lender allows recasting:

• Make a lump-sum payment

• Lender recalculates (lowers) your payment

• No credit check

• No appraisal

This can help even if you’re underwater.

2. Loan Modification

If financial hardship applies:

• Lenders may lower your rate

• Extend your term

• Reduce monthly payments

• Help you avoid foreclosure

There is no hard-and-fast equity requirement for loan modifications as each lender has their own rules.

3. Wait for Equity Recovery

Home values can rise through:

• Market appreciation

• Renovation

• Higher sale comps

Even a 5–15% price recovery may restore your equity and increase your chances of refinancing.

4. Pay Extra Toward Principal

Extra payments reduce your loan balance faster, shrinking negative equity. Use a mortgage calculator to determine how much extra you should pay to realize the equity you need in a given time period.

5. Sell Strategically (If Necessary)

If underwater, you may still:

• Sell and bring cash to closing

• Negotiate lender approval

• Explore short-sale options (last resort)

Where Fincast Fits In for Underwater Refinances

Even with negative equity, lenders may still offer refinancing through streamline programs—but pricing varies widely.

Fincast helps you verify whether your offer is fair.

How it works:

1. Upload your Loan Estimate

2. Fincast analyzes your offer

3. Vetted lenders compete to beat it

4. You choose the best deal

Underwater borrowers often receive inconsistent pricing — making benchmarking especially important.

FAQs: Negative Equity Refinancing in 2026

1. Can I refinance with negative equity?

Yes — only through specific FHA or VA streamline programs, or rare portfolio lender exceptions.

2. Can conventional loans refinance negative equity?

No. Conventional refinances require positive equity.

3. Does FHA allow underwater refinances?

Yes — through the FHA streamline, which often requires no appraisal, depending on the lender.

4. Does VA allow negative equity?

Yes — the VA IRRRL does not require an appraisal, but some lenders still might require one.

5. How do I know if my home is underwater?

Compare your loan payoff amount to your current home value. If payoff > value → negative equity.

6. Should I wait to refinance until I regain equity?

Possibly — unless you qualify for a no-appraisal streamline refinance.

Bottom Line

Refinancing with negative equity in 2026 is possible — but only through FHA and VA streamline refinances or very limited portfolio lender options. Traditional refinance programs require positive equity, so underwater borrowers must rely on specialized programs or consider alternatives such as recasting or loan modification.

👉Since only a handful of lenders offer these programs, comparing pricing is essential. Upload your Loan Estimate to Fincast to anonymously benchmark your offer and potentially get competitive offers from vetted lenders. No new applications. No credit check.

• This article is for educational purposes only and does not constitute financial advice. Consult with a licensed mortgage professional for your specific situation.