For underwater homeowners, the 125 percent refinance offered through the government's Home Affordable Refinance Program (HARP) sounds like a great deal. But how hard is it to qualify for?
Surprisingly easy, for some - and it doesn't necessarily depend on your credit rating or even how far underwater you are. In fact, you may still be able to refinance even if you owe more than 125 percent of your current home value!
"It's a great deal for consumers, if you can get it done," said Kevin Iverson, an independent mortgage broker who's handled numerous government-backed refinances. Iverson, president of Reed Mortgage Company, in Denver, Colo., recently spoke at length with Mortgageloan.com about 125 percent refinances and the borrowers who are most likely to qualify for them.
Some background: the HARP 125 percent refinance is designed for homeowners who are underwater" on their mortgages, or owe more than their property is worth. If you have a mortgage backed by government-supported lenders Fannie Mae or Freddie Mac, they will authorize refinancing it at up to 125 percent of your current home value, provided you meet certain guidelines.
So, for example, if you owe $125,000 on a mortgage but the value of your home has dropped to $100,000, you can still refinance to a lower interest rate.
Nontraditional mortgages may be easier to qualify
Strangely enough, your credit score and how far underwater you are may have less impact on your ability to obtain a HARP refinance that the type of mortgage you have, according to Iverson. Borrowers who originally took out "80-20" mortgages or similar loans designed to eliminate the need for private mortgage insurance are likely to have an easier time than those who took out simpler, more traditional-type loans that required insurance.
"Those are the borrowers who do really, really well," said Iverson.
There are two main reasons for this. The first has to do with private mortgage insurance, which can make if far more difficult for underwater borrowers to refinance, even when using HARP. But borrowers who originally took out an "80-20" or similar mortgage (where the primary mortgage covered 80 percent of the purchase price and a second mortgage was used to cover the 20 percent down payment) didn't have to take out mortgage insurance in the first place. And under HARP rules, if you don't have mortgage insurance on your current loan, you don't need to get it when refinancing.
The second reason has to do with loan-to-value ratio. Borrowers who took out an 80-20 or similar mortgage have a smaller primary mortgage than those who may have gone the more traditional route of taking out a single mortgage for 90-95 percent of the home value, and covering the rest with a cash down payment.
Primary mortgage is key factor
Under the HARP, you can refinance as long as the amount owed on your primary mortgage does not exceed 125 percent of your current home value. So even though the borrower who took out an 80-20 mortgage will have more mortgage debt (and less home equity) than one who took out a single mortgage for 90-95 percent of their home value, their primary mortgage will be smaller (assuming identical purchase prices).
That means they can sustain a greater decline in home value and still stay within the 125 percent HARP limit. It also means their total mortgage debt can exceed 125 percent of their home value and they can still refinance their primary mortgage, as long as it is within that limit.
To qualify, the lender holding the second mortgage still has to agree to resubordinate that loan; that is, allow the refinanced primary mortgage to still have first claim on the home equity in the event of a default. But that's not really a problem, according to Iverson, since most second mortgage holders in these situations have already seen their equity stake wiped out and are happy to cooperate if it means the homeowner is less likely to face foreclosure.
"I have yet to see anybody say they wouldn't subordinate, as long as the borrower isn't getting any cash out of the situation," he said.
Shopping around for a lender
There's another wrinkle: Although Fannie Mae and Freddie Mac will authorize refinances at up to 125 percent of current home value, Iverson said most lenders won't go above 105 percent unless it's a loan that's already in their portfolio.
"It's a great program, Fannie and Freddie are doing it, but the reality is these lenders don't want to go to 125 if they're not servicing it," he said.
Iverson said lenders are typically willing to refinance their own mortgages up to the 125 percent level, but they may not offer as attractive terms as another lender might.
"Where this really hurts consumers, if they're stuck going to the same lender or servicer, is they only have one chance," Iverson said. "They can't shop around."
80-20 mortgage can handle bigger drop in home value
That's another reason that borrowers with an 80-20-type mortgage have a significant advantage under HARP - their ability to sustain a drop in home value and remain within the 105 percent limit is even more pronounced than it is at the 125 percent level.
For example, a borrower with an $80,000 primary mortgage on a $100,000 home can sustain a decline in home value to about $76,100 (a 23.9 percent decline) and still be within the 105 percent loan-to-value limit and able to shop around for lenders. On the other hand, a borrower with a single $90,000 mortgage on the same home can only sustain a decline in home value to about $85,700 (a 14.3 percent decline) and remain within that limit.
Minimal markup on interest rates
Overall, Iverson said, the interest rates on HARP refinances are pretty good - typically about half a percent higher than what would normally be charged to customers with perfect credit and 20 percent equity. That compares to an add-on of up to about 2.75 percent that Fannie Mae and Freddie Mac typically assess for borrowers with poor credit or minimal down payments on home purchase loans.
With rates where they are these days, Iverson said, that means borrowers who qualify get a 30-year fixed-rate refinance at about 4.75 percent - even with blemished credit.
There are other qualifications borrowers must meet for the HARP program. Even though credit scores are not an issue per se, borrowers still must have been current on their mortgage payments for at least the last 12 months, as well as meeting some other requirements. Even so, Iverson said the benefits are such that it's worthwhile for borrowers to seriously look into the program.
"Rates are great and there are some really good programs out there. Even if you're underwater and your credit's not great, you can take advantage of these things," he said. "You ought to at least be out there asking the questions."