It appears that more homeowners with little-to-no-equity are gaining an interest in refinancing. More importantly, they’re gaining confidence that there is an option. This is good news as it appears the Home Affordable Refinance Program (HARP) is gaining both momentum and attention.
This seems like the right time to give homeowners an extensive guide to HARP, including who it best benefits, how to give homeowners the best shot of getting approved as well as other options to low-equity refinancing.
To clarify one fact about HARP that many homeowners do not know, YOU DO NOT NEED TO USE YOUR CURRENT LENDER TO GET A HARP LOAN. Shop your HARP loan like any other refinance. The only exception to that rule is if your current loan has PMI, which can only be refinanced through your current lender at the moment. Even then, a very small handful of lenders will do a HARP loan with PMI. Also, HARP is not limited to homeowners only. You can use HARP on 2nd homes and investment properties as long as the loans are owned by Fannie Mae or Freddie Mac. In fact, they are actually perfect for investment properties. You can read more on this topic here. This contradicts the Making Home Affordable website, which states you may be eligible for HARP if “Own a one- to four-unit home that is your primary residence.” I can tell you from first hand experience that you can use HARP on 2nd homes and rental properties.
From my experience, the loan pricing offered from current servicers is often higher than from a new HARP lender. However, there are times the current servicer can offer a version of HARP that no other lender can. This can include no income verification or appraisal, which can be very helpful for some homeowners who feel they’ll have issues qualifying. Remember that other HARP lenders can loan on underwater mortgages, but if you think your home will appraise for less than what’s needed for HARP, using your existing servicer may be worth it even if they are charging a premium for the loan. If you think you’ll fit within income and equity requirements for the HARP lender you’re talking to, shop your loan like a regular mortgage.
One unfortunate fact is some loan servicers do not originate new loans. If your loan was sold to a company like Cenlar or Seterus (added 10/25/2011), then the special HARP options (such as PMI HARP loans) will be unavailable to you unless you find a specialized lender who participates in PMI HARP Loans. This is because companies like Cenlar do not originate new loans, they only service the payments. Email me if you want a referral.
Large banks also only offer HARP loans for the loans they service. If you bank with Bank of America and have a Cenlar serviced loan, Bank of America can’t help you. Look for a Fannie Mae or Freddie Mac lender who does HARP loans in your area.
The HARP program was designed to help homeowners who are looking to refinance but have lost some to all of their equity in their home. It only applies to homeowners who currently have a Fannie Mae or Freddie Mac owned loan, but that does not mean HARP is a homeowners only choice. In fact, there’s surprisingly several opti0ns available to homeowners that may not have considered, nor did their lender give as an option. In this post, I will cover who qualifies for a HARP refinance, who best benefits from HARP guidelines, which customers do not qualify for HARP and some alternatives to consider. One EXTREMELY important detail to note is you cannot refinance under HARP if you have already applied for a modification (HAMP-Home Affordable Modification Program. If you haven’t decided which is better for you, apply for a HARP refinance first. If your HARP refinance application is turned down, you can proceed with a modification application. Attempting to modify your loan first will disqualify you from a HARP refinance.
WHO IS FANNIE MAE AND FREDDIE MAC, AND HOW DO I FIND OUT IF THEY OWN MY MORTGAGE?
One topic that is very confusing for homeowners is finding out who really owns their loan. You think it would be as simple as looking at the name on your mortgage statement, right? Not so. In fact, it’s very rare for a loan to be truly owned by the company you make your payments to. Lenders usually sell their loans to another entity. They also will collect payments in behalf of that entity which is called “Servicing.”
Let’s suppose you buy your house using Wells Fargo as your lender. Wells Fargo then sells your loan to Freddie Mac. Wells Fargo still collects your payments and passes the payments back to Freddie Mac while collecting a small fee for the service. In this scenario, your loan is owned by Freddie Mac but Wells Fargo is your servicer.
There are several steps you can take to find out if Fannie Mae or Freddie Mac owns your loan. It’s vital to try all options before you give up because not all methods work the first time.
The first place to check to see if either Fannie Mae or Freddie Mac owns your mortgage is an online property lookup tool
Fannie Mae’s lookup tool:
Freddie Mac’s lookup tool:
If your property does not show up on either of the property lookup tools, you should still call Fannie Mae or Freddie Mac to see if they own your mortgage. Fannie Mae and Freddie Mac do not always have the exact address saved correctly. This is why it’s important to call.
Fannie Mae’s phone number:
1-800-732-6643 or 1-800-7-FANNIE
Freddie Mac’s phone number:
1-800-373-3343 or 1-800-Freddie
If you don’t have luck there, contact your current servicer and see if they know if you have a Fannie Mae or Freddie Mac loan. Lastly, you can have the mortgage company you’re applying a HARP loan from run an automated approval through Fannie Mae’s Desktop Underwriter or Freddie Mac’s Loan Prospector software and it may indicate if the property qualifies for a HARP loan.
MY LOAN IS A FANNIE MAE OR FREDDIE MAC LOAN. NOW WHAT?
First, find out if your current loan has mortgage insurance. As it stands now, HARP guidelines require that you work only with your current servicer if your loan has mortgage insurance. However I have not heard of one servicer who will do this loan. This topic was covered in my blog post, “Another Flaw With the HARP Program.”
HARP guidelines say a homeowner can finance up to 125% of their home value. Most lenders are still following the original guidelines of 105% but a couple of lenders are beginning to finance up to 125%. Both of these limits are for a first mortgage. Currently, HARP guidelines do not have a limit to how high your combined-loan-to-value (CLTV) is which means if you have more than one loan, the total amount you owe against your house is not considered in the qualifications of a HARP loan as long as the first mortgage is in the 125% allowable range.
The Federal Housing Finance Agency released new changes coming to HARP which include loans over 125% and extending the program until the end of 2013. They are also removing some lender warranties, which will encourage more lenders to participate in riskier HARP loans such as PMI insured HARP loans and loans with higher loan-to-values. You can read more about these changes on a new blog post I wrote here.
Even though Fannie Mae and Freddie Mac both allow above 100% financing, please note that the loan pricing is more expensive. HARP loan pricing is best suited for 95% combined-loan-to-value or less meaning you’ll get your best rates and fees if you have at least 5% equity between all loans owed against the house. Pricing is increased between 95.01-97% and increased again for anything above 97.01%. This means you’ll want to be very careful of how much you borrower on your house if your loan amount is near the value of your home. If your current Fannie Mae or Freddie Mac loan does not have mortgage insurance, you will not be required to get mortgage insurance on your new HARP loan. This is one of the major benefits of doing a HARP refinance.
These programs are also very credit score driven. Best pricing is for homeowners with a 720 credit score or higher. You can answer a quick 4 question eligibility test on the HARP website here.
Here is a quick summary of the HARP loan requirements:
- your loan will need to be owned by Fannie Mae or Freddie Mac
- your current loan should not have mortgage insurance (you can contact your current servicer per guidelines but I have not heard of one servicer who will do this yet).
- you can go as high as 105% of your home value with most HARP lenders and 125% with a few lenders but preferably be at 95% or lower for best pricing.
UPDATED May 29th, 2010-
There have been two major hurdles on HARP loans that appears to be much easier to overcome. One, many HARP lenders are now implementing price caps. What does that mean? Simply this…it doesn’t matter how bad your refinance situation looks, you’ll never pay more than “X” over the best interest rate that lender has to offer. Lower credit, condo, investment property or second home, you will not have to pay the huge premiums that HARP loans had last year. Not all lenders implement a price cap, so it’s important to shop your loan. Remember when I said you do NOT HAVE TO USE YOUR CURRENT LENDER? I can’t stress this enough. Most of the rates/fees I’m seeing from current lenders are much higher. I have a feeling that most of these lenders know that their current customers check with them first, so they build large premiums in their pricing. Dont’ pay too much for your loan…be sure to shop it around!
Two, if you once applied for a HARP loan and was denied because you have a second mortgage that would not allow you to refinance your first mortgage (called a subordination agreement), many lenders have worked with the government and are now allowing subordination. Below is a list of lenders who I’ve been able to get the subordinations approved with relative ease even though the loan amounts exceeded 100% of the home value:
- Bank of America
- Wells Fargo
- Key Bank
UPDATED June 17th, 2010-
It’s important to know that HARP is only eligible for loans that were purchased by Fannie Mae by March 1st, 2009 and May 31st, 2009 for Freddie Mac according to a source. A colleague of mine (Rhonda Porter at Mortgage Master Services) recently worked with a client who originated a loan LONG before March 1st, 2009 but Fannie Mae did not securitize (or purchase) the loan from the lender until after this date. This made the loan ineligible for a HARP refinance. Here is an excerpt of her blog post here:
We also need to eliminate the securitization factors of when Fannie or Freddie bought the existing mortgage for it to be eligible for a HARP refi. I recently had a client where it showed on Fannie Mae’s site that he indeed has a mortgage owned by Fannie Mae–it was not until we received an error message trying to underwrite it through DU (the automated underwriting system) that we called Fannie Mae to discover that the loan had been securitized (purchased by Fannie Mae) one day too late to qualify (March 1, 2009). This person’s loan closed in December 2008, was sold the the bank and then took months for Fannie Mae to purchase. This means this upside-down home owner does not qualify to reduce his payment by $250 per month. Imagine what the $250 a month would do for him and/or the economy. It gives him some probably needed monthly financial wiggle room and he just might spend a little more which helps our economy too.
To read more, CLICK HERE
If your lender says your loan is backed by Fannie Mae but you’re not eligible for HARP, here’s the instructions to see if your loan was purchased by Fannie Mae during the eligible time frame for HARP.
- Tell your lender who’s applying for the HARP loan for you to have their Fannie Mae seller ID, Desktop Underwriter findings, case number and Desktop ID number. You may not know what this is but your lender should.
- Have them call 877-722-6757
- Ask the representative to “verify the address in the servicing database” to ensure the address is correct and ask if the loan is eligible for a DU Refi Plus
WHAT IF MY LOAN HAS PMI?
HARP guidelines state you can refinance if your loan has PMI but that’s rarely true. Only direct lenders who service your loan can do these and even then, very few will. I referred a very close family friend back to Bank of America hoping they could help him with his PMI loan serviced by BOA, but no luck. I wrote about this event HERE.
I started a small list of lenders who do refinance HARP loans with PMI. You can find that list HERE.
I NEED OTHER OPTIONS. WHAT ELSE IS OUT THERE?
Surprisingly, there are some great options available if you do not qualify for a HARP loan or you don’t like the pricing.
A great alternative for the general public is FHA. FHA allows up to 97.15-97.75%(depending on your area) of the home to be financed. What makes FHA special is they do not have a limit for combined loans AND there are no negative pricing adjustments if the 2nd mortgage exceeds 100% like HARP loans. Let’s suppose you have one loan at 95% of the home value and a second mortgage equal to 15% of the home value. The two loans together equal 110% of the home value. You then can pay off just the first mortgage with a FHA loan and keep the second mortgage above 100% of your value. More importantly, FHA has much lower credit score requirements, the previous loan does not need to be a Fannie Mae or Freddie Mac loan and it doesn’t matter if the loan being paid off has mortgage insurance. The only caveat is that all FHA 30 year loans require mortgage insurance.
My favorite option using FHA is their 15 year mortgage. FHA allows a homeowner to finance up to 90% of their home on a FHA 15 year loan with NO MORTGAGE INSURANCE. The same guidelines regarding combined value and credit apply as above.
Let’s say I have a homeowner who is interested in a 15 year fixed loan and no equity. They have a loan equal to 85% of their home value and a second mortgage equal to 25% of their home value for a total value of 110%. They can refinance on a FHA 15 year loan and payoff the first mortgage and keep the remaining second mortgage. They do not pay mortgage insurance on the first mortgage and there are no pricing adjustments for the 2nd mortgage exceeding 100%. Yes, 15 year loans have a higher payment since the pay off is faster, but between the lower rate of a 15 year loan and the removal of mortgage insurance, much of the payment increase is covered. Plus this loan will pay down the borrower’s balance faster helping the homeowner gain their lost equity back.
Second, military veteran’s should find out if they can finance their new refinance with a VA(Veteran’s Affairs) loan. In October of 2008, the department of Veterans Affairs opened up the guidelines for veteran’s to allow them to refinance higher loan amounts and up to 100% of their home value when paying off an existing non-VA loan. This is a huge improvement to previous guidelines which only allowed up to 90% of the home value with a maximum loan amount of $144,000. However, the VA does not allow the loans to exceed 100% of the value under any circumstances. If you have two loans and they equal above the value of your home, you cannot do a VA loan.
To recap, here is a summary of when you would want to consider government loan programs:
- For veteran’s who owe up to 100% but not over 100% of their value, VA is a great loan option
- Homeowners who owe up to 97% of their first mortgage and have a second mortgage above 97% should consider a FHA loan. If the homeowner’s first mortgage is not a Fannie Mae or Freddie Mac loan, FHA will likely be their only option.
- Any homeowner who has little equity and does not have a loan owned by Fannie Mae or Freddie Mac should consider a FHA loan.
- FHA 15 year loans do not require mortgage insurance as long as the FHA loan is at 90% of the home value or less REGARDLESS of the 2nd mortgage balance and combined loan-to-value.
New FHA guidelines will no longer allow financing with second mortgages exceeding 100% of the home value. All FHA applications dated after September 7th, 2010 will be subject to these new guidelines. Read more about how this affects homeowners who are applying for a refinance with a second mortgage here:
For the most part, homeowners are limited to the loan products above. However, that does not mean they do not have other options. Whether a homeowner needs a little more equity to qualify for any of the loan options above or to improve their loan pricing, they may consider getting another loan somewhere else to cover the cost.
One suggestion I’ve given clients that has helped is getting a 401k loan. 401k loans are loans taken against a person’s retirement plan. It’s not a withdrawal of retirement funds, so the person does not pay tax or penalty costs for the loan. In many cases, the interest the person pays on a 401k loan is actually used to fund their retirement account which means they’re paying interest to themselves.
On a Fannie Mae HARP refinance (DU Refi Plus), the additional cost from a 95% loan-to-value loan to a 97.01+% loan is a 1.75% fee. This means if your appraisal shows you have 2.99% equity or less, you have to pay a 1.75% fee or higher rate compared to someone that had 5% equity. If you could get a small 401k loan to cover the difference, it may be worth your while. On a $200,000 loan amount, a 1.75% fee is $3,500! Borrowing $4,000 (2%) more in equity that you will pay yourself back to save a $3,500 fee you will never get back is a great money-saving solution.
If you are looking to do a HARP refinance and currently have a fixed mortgage through Freddie Mac, you cannot do an Open Access Freddie Mac HARP refinance to an adjustable rate. You can only refinance to another fixed loan.
The HARP program was set to expire on June 10th, 2010. The program was extended and now is set to expire on June 30th, 2011, approximately one year later. News of this extension can be found here.
FHA REFINANCE FOR UNDERWATER MORTGAGES-
FHA just announced that they will be rolling out a new program to help underwater homeowners. This was announced along with some updates to the HAMP program.
UPDATE AUG. 6TH, 2010
HUD released a press release regarding this program:
|HUD No. 10-173Brian Sullivan
August 6, 2010
FHA LAUNCHES SHORT REFI OPPORTUNITY FOR UNDERWATER HOMEOWNERS
Effort designed to encourage principal write-downs for responsible borrowersWASHINGTON – In an effort to help responsible homeowners who owe more on their mortgage than the value of their property, the U.S. Department of Housing and Urban Development today provided details on the adjustment to its refinance program which was announced earlier this year that will enable lenders to provide additional refinancing options to homeowners who owe more than their home is worth. Starting September 7, 2010, the Federal Housing Administration (FHA) will offer certain ‘underwater’ non-FHA borrowers who are current on their existing mortgage and whose lenders agree to write off at least ten percent of the unpaid principal balance of the first mortgage, the opportunity to qualify for a new FHA-insured mortgage.
The actual guidelines for FHA were also released on HUD’s Mortgagee Letter 2010-23. Lender use mortgagee lenders as their guideline to originate FHA loans, which means that lenders should be approving these mortgages now. What I found that was interesting is that existing FHA guidelines technically already allowed these types of refinances. The limit on the second lien mortgage is actually a cap that used to not exist on FHA financing.
The mortgagee letter does begin to illustrate the benefit the second lien holders will receive for taking reduced payoffs. The letter indicates each servicer will receive $500 and incentives based on combined-loan-to-value.
Existing second mortgage lien servicers will be entitled to a one time incentive of $500 for each successful closing. Existing second mortgage lien investors will be entitled to an incentive based on the combined loan to value of the existing lien and all senior liens associated with the mortgage. The actual incentive pay-out schedule and more information on this program will be available at www.hmpadmin.com.
The announcement states that the program will begin September 7th.
I’ve studied the material for this new program and surprisingly, it’s not that different than a regular FHA loan. The difference is the government is giving incentives to the homeowners existing lenders to write down their loan balances, thus allowing the borrower to qualify for a new FHA loan. Here are the requirements:
- The new FHA loan can be as high as 97.75% of the homes value
- The homeowners existing loans cannot be a FHA loan
- For the existing lender to qualify for government incentives, the first mortgage must require at least a 10% write-down from the original balance of the first mortgage
- The government is also giving incentives to second lien lenders as well. They will give them incentives to write-down their balances so the combined value of the first and second mortgage do not exceed115% of the home value. As you’ve seen from my original posting regarding FHA loans, FHA allows second mortgage companies to have an infinite value over the value of the home as long as the FHA first mortgage is at 97.75% or less. This is one difference between this program versus a regular FHA loan.
- The refinance is voluntary, so both the homeowner must agree to the refinance terms and the existing lenders must agree to the write-down of their loan balance.
- The homeowner cannot be late on their mortgage payments
- The homeowner must occupy the property
- The minimum credit score for this program is 500 (Though I doubt lenders will fund new FHA loans with a score this low)
- The total house payment, including the payment of a second mortgage, must be no greater than approximately 31% of the homeowners gross income. Further, the total household debt cannot exceed approximately 50%. (I love how they use “Approximately” in the definition).
They key to this program is that the government is INCENTIVIZING lenders to write-down their loans. What does this really mean? The lender writes off the balance of the loan exceeding 97.75% of the homes value and the government will give them money to help recoup the losses. It’s for homeowners who have paid their mortgage on time, so it’s right in-line with HARP clients. There are two major differences. When a homeowner refinances on this program, they will owe less on their house thanks to Uncle Sam. Also, they can refinance to a low 30-year fixed rate regardless of what kind of loan they have. This may end up being the solution for homeowners who have loans with mortgage insurance.
There are many details that still need to be answered. FHA currently has loan limits depending on the county. Will these loan limits remain? My guess is they will, so be sure to check your local FHA loan limit here. They have not said who can originate these loans yet either. I hope that they have learned from their mistakes with HARP and allow any lender to originate the new loan. HARP loans with mortgage insurance required homeowners to work with their existing lender, yet none of the major banks who participated in HARP have begun refinancing homes with mortgage insurance.
If this program is available to all FHA lenders, this has the potential to be a big success. However, there are many obstacles to overcome. First, every lender will need ample time to service the write-down requests and the origination of the new loans. At the time of this update, HARP has available for approximately a year, yet many lenders are still giving homeowners difficulty. If this program has an expiration date of anything less than 2 years, it will have little impact on our housing market. Except, of course, if the government extends it (that tends to be norm these days).
This brings up two questions. When will lenders start offering this program and what incentives are given to the lender from the government? The “Frequently Asked Questions”of this program state the program will be rolled out immediately and will hopefully be in affect this fall. I will be researching to find out what the incentives are for the lender. If the incentves are minimal, this program will fail. If the incentives are too large, it raises the question, “Who’s paying for this?” I believe all of us can answer that question.
For lenders, it sounds like we’ll be wearing two hats. Originating a new FHA loan and negotiating a principal balance write-down with the current lenders. I’m interested in seeing how this plays out.
Be sure to revisit this blog post for any updates.
FHA REFINANCE UPDATE 6/9/2010
I confirmed with HUD (The Department of Urban and Housing Development) that FHA will insure these refinances regardless of the new lender. This means consumers can competitively shop a FHA refinance for a reduced balance payoff. The program is fairly straight forward and easy enough that we should see some success. That said, HARP is a very straight forward program but I hear horror stories almost daily, so like HARP, I don’t expect all lenders to execute these well.
The unique twist to these refinances that will hold up many refinances from closing is the negotiations with the existing lenders. Lenders and loan officers are having a hard enough time closing the loans. Negotiating an existing lender to take a lesser amount opens up the chance for increased liability and error. I believe the most successful lenders will likely be working with attorneys who will handle these negotiations similar to loan modifications and short sales. I’ve already begun speaking with attorneys who specialize in these services to see what they’re opinion is of this program. Stay tuned for updates.
Although FHA guidelines allow for these refinances, many lenders will not close these loans. If you’re looking for a refinance of this type, be sure to find a lender who can do this loan first, then see if there’s a loan officer at the firm who has experience with these transactions. They’re new, so don’t expect great results if you’re an early adopter. I will provide updates of my experiences and post lists of lenders and loan types I’ve had success with. Follow this post in the future for these updates.
For FHA to insure a refinance with a short payoff, the borrower must prove
- There is insufficient equity in the home based on it’s current appraised value AND/OR
- The borrower has experienced a reduction in income and does not have the capacity to repay the existing indebtedness against the property.
Unlike short sales and loan modifications, the borrower will not be asked to slow pay their mortgage to qualify. FHA allows a couple of late payments but nothing more than 2x 30-day late payments in the last year and the loan cannot currently be late.
The deadline for HARP loans has been extended until June 30th, 2012 (1-year).