Since 2008, many homeowners who bought into home ownership and real estate at the height of the market have since seen their property values plummet, far lower than many borrowed to purchase those homes in the first place. While many have ultimately lost their properties and walked away from them or let go through short sales or foreclosure, still many more have held on, faithfully paying their mortgage but trapped in an “underwater” status, unable to get out of their situation with a negative home equity status.
As a part of the new efforts to help boost the country’s weak but recovering economy, the federal government has financed the support of HARP 2.0, a program that provides refinancing vehicles for homeowners who have kept their homes but are still paying too much versus what the home is worth.
HARP 2.0 builds on the original design of the first HARP program, officially known as the Home Affordable Refinance Program. The primary goal of the original system as well as the 2.0 version is to provide a refinancing vehicle for homeowners who, because of equity and loan formulas used by lenders, can’t use traditional loan tools to fix their situation. As a result, many have simply given up and abandoned homes and let them foreclose, which contributed to economic malaise in hard hit communities, as well as blight. To fend off this problem, the federal government uses the two HARP programs to let eligible homeowners redesign their financial situation into a more common sense package, subsidizing the loss to the original lender to help get the original mortgage released.
That said, not everyone can use the program. It’s targeted on those homeowners and mortgages that the government already underwrites through its two major loan corporations, Fannie Mae and Freddie Mac.
The first HARP program was intended for homeowners with mortgages financed or secured by Fannie Mae or Freddie Mac. Additionally, the loan had to be at a 125 percent or more loan to value ratio result at the time of application. Under HARP 2.0, 11 million properties are potentially eligible for federal help. The properties still need to be underwritten and secured by either Freddie Mac or Fannie Mae. The federal government won’t benefit homes that are not already on its portfolio of loan risks. Further, even those securitized by the two corporations aren’t always eligible. The affected mortgages needed to have been issued prior to May 31, 2009. Finally, if a homeowner was already benefited by the first HARP program he can’t jump into and apply for the HARP 2.0 program refinancing again.
The best way to know right away if a mortgage home is even eligible for help is to look up the property here on either Freddie Mac or Fannie Mae's databases:
One key aspect of the HARP 2.0 program that makes it easier for homeowners to participate is the fact that the loan to value ratio criteria of 125 percent no longer applies. There is a minimum however. Homes with less than 80 percent LTV are ineligible to be refinanced through HARP 2.0. That said, borrowers still need to find a HARP 2.0 participating lender that will work with their property. Each lender has the flexibility to take candidates, or not. Lenders can also inject other criteria into the consideration of an applicant including substantiated income, work history, property location, credit history, assets on record, and other allowable criteria that doesn’t discriminate. So there is still a challenge in some areas, depending on lender availability.
One advantage for applicants is that payment history is one of the areas not negatively impacting an application. What is important is that the homeowner hasn’t had a late payment for at least the last six payment cycles prior to the application. Further, there should only have been one late payment maximum within the last 12 months prior to application. For those who have had a late payment, there’s still time to apply with a “clean” slate. The program won’t end until December 31, 2013. So, if a person, for example, missed a payment in November 2012, he could still apply by July 2012, well before the program expiration deadline.
Payment calculations under a new refinancing are always a good question to ask before getting into a new loan. Granted, the goal of HARP 2.0 is to make it easier for a homeowner to manage his loan with better cash flow and/or a better interest rate. That said, each application will go through its own process and loan offer, sometimes not quite as good as before. For example, a previous home loan could have been an interest-only loan that was based on a market index. It was an attractive, low monthly payment at the time, but then the rate reset and the mortgage payment went up. Under HARP 2.0, such a loan could be eligible for refinancing. However, under HARP the new loan will include a payment for both principal and interest. That in turn can make the total monthly payment due under the new calculation still bigger than what was paid with the expensive interest-only loan. So running the numbers is smart and important before signing anything new.
Credit history and credit score do come into play with HARP 2.0 but not near as strict as was seen with banks themselves after 2008 and the credit freeze. Under HARP, an applicant needs to at least have a credit score of 620 for qualification. That score needs to include all three credit reporting agencies, not just one of them. The HARP 2.0 program will also only allow so much debt to be taken on per property as well. This is determined via the debt-to-income ratio, or DTI. The DTI score needs to be below 45 percent for an applicant. If the applicant has too much debt outstanding versus income coming in, verifiable income at that, then the application won’t go through. This will still continue to be problematic for those who earn their income through self-employment and contracting versus traditional payroll. So documentation is key, such as tax records of income earned and reported to the IRS.
If all of the above hurdles are met, then a homeowner can take advantage of HARP 2.0. The program can help reduce a previous interest rate, adjust a monthly mortgage payment for cash flow benefits, and readjust a loan to match the value of a home better. All of these can be advantages versus a current home mortgage situation. So, if your situation seems to be eligible and a lender is available, take a look at the program. Simply finding out options available can be significantly helpful, even if a homeowner ends up staying with his current mortgage anyways.