Homeownership has been the focal point of the American Dream for as long as many of us can remember. However, the downturn in the housing market has turned that dream into a nightmare for millions of Americans. Perhaps the most difficult scenario to resolve occurs when the home’s value falls below the balance owed, a situation we call being underwater. Compounding this dilemma are periodic changes in the homeowner’s monthly payment, generally associated with the adjustable rate loans offered throughout most of the last decade. Under ordinary circumstances, a homeowner would refinance their mortgage to keep the payment within their budget, but when you owe more than your home is worth, the prospect of refinancing all but disappears. The federal government’s recently extended Home Affordable Refinance Program, or HARP, is an attempt to remedy this situation.
HARP is designed to help homeowners who are current on their home payments and want to save money by refinancing at a lower interest rate. Although the program was scheduled to end in 2011, the administration has extended HARP until mid-2012. HARP allows a homeowner to refinance their “underwater” mortgage for up to 125% of the home’s current assessed value. For instance, if your home is currently assessed at $150,000, HARP applicants can receive financing up to $187,500. The structure of HARP allows individuals to refinance into a loan that carries a lower interest rate, thereby securing a lower monthly payment. It should not be surprising that securing a loan on a home assessed for less than its current mortgage value is difficult, since the risk to lenders is considerable, but if you can qualify it would make your payment a little more comfortable.
Participating in HARP requires the homeowner to meet certain criteria. HARP is a new loan, so borrowers must submit an application, supply all required documentation, meet applicable guidelines, and pay closing costs. HARP is available to homeowners whose current mortgage is owned or guaranteed by Fannie Mae or Freddie Mac, each of which has its own guidelines. For instance, Fannie Mae allows the homeowner one 30-day late payment in the preceding 12 months; however, Freddie Mac allows no late payments to have been made in the prior 12 months. Because the program is meant to stabilize your situation, the refinance must improve the long-term affordability or stability of your mortgage. And finally, you’ll need to show that you have the ability to make the new payments.
There are some challenges you’ll encounter along your way to this type of refinancing, most notably the issue of Private Mortgage Insurance, or PMI. If you made less than a 20% down payment on your home, you most likely paid Private Mortgage Insurance. This type of policy protects lenders in case you default on your mortgage. Who holds the PMI policy can make things tricky with HARP. If the borrower holds the PMI policy, which is most often the case, it can be transferred to the new loan. However, it’s been reported that it’s nearly impossible to qualify for HARP if your lender holds your PMI policy. Although HARP’s guidelines don’t specify that loans with lender-paid PMI can’t participate, the qualification rules are written in a way that disallows transfer of the certificate of mortgage insurance to a new lender. Your mortgage statement should show who is responsible for PMI, but if you can’t locate this information, contact your lender. If the lender isn’t able to help, you could also contact the Office of the Comptroller of Currency at 800-613-6743 for further assistance.
Homeowners who already have a second mortgage may find it difficult to participate in HARP, as well. Each lender holds a lien against the home, allowing them to be paid if you default on your mortgage. The first lien holder would be satisfied before the second, and so on. In order to participate in HARP, a homeowner will need permission from the second mortgage lender via a Subordination Approval. This allows the new lender to hold the first lien on the property after the home has been refinanced.
The HARP program holds promise, and the extension could benefit many homeowners who are still struggling to maintain their mortgage payments. To learn more about HARP, contact a HUD-certified housing counseling agency, such asCambridge, and speak with a housing counselor.