You may have heard that there were some changes made recently to the government's Home Affordable Refinance Program (HARP). Known as HARP 2.0, the new rules are designed to make it easier for certain homeowners with little or no equity to refinance their mortgages.
Unfortunately, there's still a lot of confusion about the changes and how they could benefit homeowners who haven't been able to refinance their mortgages. So here's a summary of some of the main elements of the program and key changes under HARP 2.0.
What is HARP?
HARP is the Home Affordable Refinance Program, part of the government's Making Home Affordable Program for at-risk homeowners. It's designed for homeowners who are current on their mortgage payments but haven't been able to refinance to a lower interest rate because they owe too much on their mortgage. In many cases, they are said to be underwater on their mortgage - owe more than the property is worth.
Who can qualify?
First of all, you have to have a mortgage backed by Fannie Mae or Freddie Mac. There's a pretty good chance you do, unless you have an FHA or VA loan, or your home was costly enough to require a jumbo mortgage - before the crash, Fannie and Freddie guaranteed the great majority of middle-class mortgages in this country.
Both Fannie Mae and Freddie Mac offer easy tools on their web sites to find out if they hold your mortgage.
You also have to be current on your mortgage payments - no more than one late payment over the past year and none in the last six months. Your mortgage must have been acquired by Fannie or Freddie prior to May 31, 2009 and must not have been previously refinanced through HARP (standard refinances are ok).
Do you have to be underwater on your mortgage?
HARP is not strictly limited to underwater mortgages. In fact, many of the home loans refinanced under HARP have been mortgages where borrowers had some equity, but not enough to qualify for a conventional refinance. HARP refinances are allowed on mortgages with a greater than 80 percent loan-to-value ratio - i.e., less than 20 percent equity - as well as on underwater mortgages where the borrower owes more than the property is worth.
125 percent cap lifted
Perhaps the biggest change in HARP 2.0 is that there is no longer a limit on how far underwater your mortgage can be and still be able to refinance. Previously, there was a 125 percent loan-to-value limit on mortgages refinanced through HARP - that is, the balance owed on your mortgage could be no more than 25 percent greater than the value of your home. Under the new rules, it doesn't matter how much your home has fallen in value, you can still qualify to refinance your mortgage.
The new rules for the program allow lenders to use automated systems to produce an estimated value for your home, rather than requiring an actual appraisal. This offers several benefits for you, the borrower. First, an automated appraisal means you don't have to pay for having an actual appraisal performed, which can save you several hundred dollars. It's also faster.
It also makes it easier to qualify, since with the loan-to-value cap lifted, they're not worried about getting a precise estimate of your home value. A lender may still require an actual appraisal in some situations, however.
Certain risk-based fees, called loan-level pricing adjustments, have been eliminated under HARP 2.0 if you refinance into a mortgage of 20 years or less. Since those fees could previously add up to an up-front charge of 2 percent of your loan amount, that's a significant savings. This was done to encourage borrowers to refinance into shorter-term loans and get back into positive equity more quickly.
On mortgages refinanced into 30-year terms, those fees have been capped at 0.75 percent, or $750 per $100,000 of the mortgage. You may be able to roll the fee into your loan or have it eliminated in return for paying a slightly higher interest rate.
Lender liability eased
One of the significant changes in HARP 2.0 is that lenders who refinance a mortgage will not be held accountable if the original lender didn't properly qualify the borrower for the old mortgage.
This may not seem important to you, as a borrower, but it makes lenders much more willing to refinance underwater mortgages originated by other lenders. Many of the mortgages that are now underwater were originated during the housing bubble, when sloppy underwriting practices were common, so this is a particular concern for lenders.
Restrictions on condominiums lifted
Under the old guidelines, you couldn't get a HARP refinance on a condominium if more than 10 percent of the units were held by a single owner, or if more than 20 percent of the units were behind on their association fees.
With large numbers of unsold and foreclosed (bank-owned) properties on the market, this blocked many condominium owners from qualifying for HARP. Now, that restriction has been completely removed, opening up the program to many underwater condo owners.
No income verification required
Another change is that you no longer have to meet any income requirements to qualify for a HARP 2.0 refinance, unless your payments are increasing by more than 20 percent a month due to shortening the term of the loan. You do have to be current on your mortgage payments, as explained above.
When did this happen?
The new HARP 2.0 guidelines went into effect in late 2011. However, some of the provisions were tied to the development of automated underwriting software needed to implement them. That software became available in March 2012, so those provisions didn't really start to kick in until then. Prior to that, lenders had to manually underwrite HARP 2.0 refinances, which was also a slower process.
The following are things that haven't changed in HARP 2.0, but help explain other aspects of the program.
Not required to refinance with the same lender
Under HARP, you're not required to refinance your mortgage with the same lender who's currently servicing it. However, many lenders, particularly the larger banks, are only doing HARP 2.0 refinances for their current customers. For this reason, when seeking a HARP refinance it's best to start out by contacting your current mortgage servicer.
Smaller lenders seem to be more willing than some of the larger ones to do HARP refinances on mortgages they did not originate. Beyond that, mortgage brokers, who work with multiple lenders, may be useful in helping you identify other lenders who may be willing to take on your loan.
Lenders may have their own rules
The guidelines described above describe the basic rules for HARP 2.0 as set forth by Fannie Mae and Freddie Mac. Individual lenders, however, may have their own rules, known as overlays, for the program.
For example, HARP has no minimum credit score requirement, but many lenders will require that borrowers have a score of at least 620 before considering them for a HARP refinance.
Lenders may also impose loan-to-value restrictions on mortgages they will refinance, even though Fannie and Freddie have no such limit. Some lenders are imposing a 125 percent loan-to-value limit for mortgages they will refinance under HARP 2.0; however, many lenders previously imposed a limit of 105 percent under the program, so even this is a more generous allowance.
Can't combine primary and second mortgages
One thing you cannot do under HARP is combine both a primary and second mortgage (such as a home equity loan or line of credit) into a single new mortgage by refinancing. You may be able to refinance your primary mortgage through HARP, but any second mortgages will have to be resubordinated (allow the refinanced mortgage to be the primary one and get paid first in the event of default) in order to do so. Fortunately, lenders are becoming increasingly willing to subordinate second mortgages in order to facilitate HARP refinances.
Investment property, second homes ok
You can use the HARP program to refinance an underwater or low-equity mortgage on either a second home or an investment property of 1-4 units, as well as on your primary residence.
About mortgage insurance
Depending on your lender and insurer, private mortgage insurance (PMI) may or may not be an obstacle to refinancing through HARP. The program rules stipulate that if your current mortgage has mortgage insurance, the new loan must have it as well. Many lenders and insurers will simply allow you to transfer your current policy to the new loan.
Some lenders and insurers may not be so willing, however. This may be the case if your original mortgage insurer is now defunct and the account is now being handled by another company that acquired the accounts.
Some lenders are also resistant to doing HARP refinances on mortgages with lender-paid mortgage insurance (LPMI); others may allow you to go up to only a certain loan-to-value limit. Again, remember that you can shop around for other lenders who will do a HARP refinance for you.
Why only Fannie and Freddie mortgages?
The reason HARP is limited to Fannie and Freddie loans is because both companies fell in government receivership during the market crash, so the government can tell them what rules to follow when refinancing mortgages. Since HARP is run through Fannie and Freddie, it can't be used to refinance mortgages backed by strictly private lenders.
The FHA, VA and USDA - all government programs - have their own programs for refinancing underwater and low-equity mortgages guaranteed by them.
HARP is presently set to expire after Dec. 31, 2016. For more information, visit the Fannie Mae or Freddie Mac web sites at www.Fanniemae.com or www.Freddiemac.com. Many participating lenders and servicers also have information about their HARP programs on their web sites.