(updated Jan. 2017)

A lot of homeowners with underwater mortgages would like to refinance, but they don't qualify for HARP (the federal Home Affordable Refinance Program). And HARP will be expiring soon anyway. Do they have other options?

Surprisingly, yes. There are other ways you can refinance a negative-equity mortgage if you don't qualify for HARP. Unfortunately, they're limited to borrowers who are in specific situations. However, more options may be on the way.


Easy refinance for FHA, VA loans

underwater refinanceIt's actually quite easy to refinance if you're underwater on your mortgage if the loan is backed by the FHA or VA. Both of these offer what are known as "streamlined" refinancing on mortgages that enable you to be approved for a refinance almost automatically, provided that you've kept up with your mortgage payments. 

With these types of mortgages, it doesn't matter how far "underwater" you are on your mortgage - that is, no matter how much the value of your home has fallen below what you owe on the loan - approval is practically guaranteed if you've been making regular payments. Credit scores, appraisals, proof of employment - none of these are necessary.

The primary criteria for a VA or FHA streamline refinance are that you be current on your payments and not have missed a mortgage payment in the past 12 months - six months on an FHA loan with no more than one late payment in the past 12.

There are certain limitations - for example, if you have a second mortgage, those must be subordinated to the new loan for the refinance to be approved, and can't be rolled into the new loan. You also cannot take cash out of a streamline refinance with either the FHA or VA.


Streamlined refinance for some USDA loans

A similar streamlined refinance is available to borrowers whose mortgage is a USDA Rural Development Loan. That program, called Streamlined Refinancing for Rural America, is available in at least 34 states.

One of the biggest obstacles to refinancing through HARP is that the program is open only to mortgages that are backed by Fannie Mae or Freddie Mac. That leaves out a lot of mortgages that were originated before the financial crisis that didn't qualify for Fannie or Freddie backing - such as stated-income loans or option-ARMs where borrowers could initially make monthly payments that didn't keep up with their accumulated interest.


Mortgage settlement refinancing

There are a few options opening up for these borrowers as well. First, under the $26 billion foreclosure abuses settlement the government reached with the nation's five largest banks, approximately $3.5 billion was designated to support refinancing for underwater borrowers with non-Fannie Mae or Freddie Mac loans.

Lenders were to contact borrowers who might qualify for refinancing under the agreement. However, if you are underwater on a mortgage that is not backed by Fannie Mae and Freddie Mac, have kept up with your payments, and your mortgage is handled by Wells Fargo, Bank of America, JP Morgan Chase, Citibank or Ally/GMAC, it wouldn't hurt to take the initiative and inquire whether you might qualify.


Possible new program in the works

HARP is scheduled to expire after Sept. 30, 2017, so that option will no longer be available after that date. The Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, has been making plans for a successor program to HARP that would allow for streamlined refinances of mortgages backed by either of those two entities.

new refinance programGuidelines for the new program released by the FHFA require that borrowers be current on their mortgage payments; have not missed more than one payment in the last 12 months and none in the last six; must have a source of income; and that refinancing must provide any of several specific benefits, including reduced the monthly payments, a lower interest rate, a shorter loan payoff or be a more stable type of loan, such as switching from an ARM to a fixed-rate.

However, it remains to be seen whether the Trump administration will allow the FHFA to go ahead with the new program or not. One of Trump's first acts in office was to rescind an Obama administration directive to reduce fees on FHA loans. So it's possible the new administration will rescind this initiative as well.



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    Published on June 17, 2016