The scheme was first announced by the government as part of a £1bn housing package unveiled last September.
It was aimed at giving support to up to 6,000 of the UK’s most vulnerable home owners and worked by allowing social landlords to buy properties at risk of repossession.
Home owners would then stay in their property as either part owners or tenants.
But it has emerged that those in negative equity previously did not qualify for the scheme, as the government has only now changed the rules to include those whose homes are worth less than they have borrowed.
A statement from the full Budget report says: “In light of house price falls over the past year, the government is extending its support for vulnerable home owners in financial difficulty through widening the eligibility criteria for the Mortgage Rescue Scheme so that households in negative equity are not excluded.”
A spokesman for the Department of Communities and Local Government says that previously the scheme was aimed at those “at the risk of homelessness”, rather than in negative equity.
The government has also announced a £20m fund to allow local authorities to give small loans to families at risk of homelessness through repossession or eviction.