In 2006, after the U.S. housing bubble burst, home prices plummeted. Many new homeowners were robbed of their happiness when they saw the value of their homes drop below the balance of their mortgages. Because banks at the time traditionally required a loan-to-value ratio (LTV) of 80% or less to qualify for refinancing, these homeowners found themselves unable to refinance to take advantage of lower interest rates.
Take for example, a house that was purchased for $160,000, but is now worth $100,000, due to the market decline. Further, assume the homeowner owes $120,000 on the mortgage. In this scenario, the loan-to-value ratio would be 120%. This was a very common occurrence, and because they were unable to refinance, many homeowners suffered through high monthly mortgage payments during one of the worst economic times in the U.S.
The HARP program (Home Affordable Refinance Program) was created by the Federal Housing Finance Agency in March 2009 to allow those with a loan-to-value ratio exceeding 80% to refinance. The HARP program was effective April 1st, 2009 and was designed to help homeowners get a new, more affordable, more stable mortgage. Originally, only those with an LTV of 105% could qualify. Later that same year, the program was expanded to include those with an LTV up to 125%.
The rules were revamped again in December 2011, and the program was given the new nickname HARP 2.0. The new changes eliminated the LTV caps, so that no matter how underwater homeowners were on their mortgages, they could refinance. The FHFA decided there would no longer be any limit on negative equity for mortgages up to 30 years, meaning those with an LTV higher than 125% could still refinance without private mortgage insurance. However, many mortgage lenders have implemented their own their own LTV caps, so be sure to ask about this when speaking to a professional.
You may be eligible for HARP if you meet all of the following criteria:
- The mortgage must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009.
- The mortgage cannot have been refinanced under HARP previously, unless it’s a Fannie Mae loan that was refinanced under HARP from March-May, 2009.
- The current loan-to-value (LTV) ratio must be greater than 80%.
- The borrower must be current on the mortgage at the time of the refinance, with a good payment history in the past 12 months.
Steps to Refinance with HARP
- Determine whether your mortgage is owned or guaranteed by Fannie Mae or Freddie Mac by visiting their websites.
- Contact various mortgage lenders to find out if they offer the HARP program, and compare rates and costs.
The Good News about HARP 2.0
More than 78,000 home loans have been refinanced through the HARP program and the program continues to help underwater homeowners. HARP is scheduled to end on December 31st, 2013, so if you qualify, don’t miss the opportunity to save yourself some money.
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