Many homeowners were surprised during the recession by the significant drop in value of their homes. This created the so-called underwater mortgage. Prior to the recession, this was a rare occurrence as the housing market generally tended to rise. The only exceptions were in depressed areas where a major industry had collapsed. If the city was isolated and the residents were forced to leave, the housing prices could quickly drop below the remaining amount of principal. This situation became widespread in many areas as the economy in general dropped, the housing market fell, and many with home loans newer than 10 years found that their home value had dropped as much as 50% or more. In response, the government instituted the HARP loan to help homeowners in this situation.
Beneficiaries of the HARP Loan
The HARP (Home Affordable Refinance Program) was not primarily designed for financially stressed homeowners who had missed payments and were in danger of losing their homes. (One example is the HAMP (Home Affordable Modification Program) which works with homeowners facing foreclosure.) HARP is targeted for those who can no longer leverage their initial equity to take advantage of current low interest rates.
Limitations of the HARP Loan
Homeowners in this situation can start by qualifying their loan. The first thing to check is if Freddie Mac or Fannie Mae backs the loan. Neither of these organizations deals directly with the public, and so many are unaware of whether their loans are linked to one of the two or not. The way to find out is to visit the official websites of each and enter the loan provider and loan number into an online form. In this way, homeowners can quickly find if they are in the running for HARP or not.
The second thing to check is the current loan to value ratio. The current loan amount (the remaining principal) can be found on the homeowner’s latest mortgage payment statement. An estimate of the home value can be found on the most recent property assessment. If the ratio of these numbers is close to 80%, the homeowner can go forward with the application.
PMI (private mortgage insurance) is common with loans originating with less than 20% down payment. PMI hedges the risk associated with a high loan-to-value ratio. PMI can make it difficult for homeowners to refinance through their original loan provider. Because HARP requires the same level of coverage, restricting the PMI can be difficult and time-consuming. This discourages many lending institutions to refinancing with HARP. However, HARP 2 allows homeowners to go to any lending provider, making it easier for a homeowner to take advantage of the program.
HARP can be used for home loans of all occupancy types, including primary residence, second home, or rental property. However, the HARP rates for non-owner-occupied properties are higher. In addition, the home appraisal waiver may be waived if an automated valuation model is available. However, this is totally at the discretion of the loan provider.
The Future of HARP
The government is considering a new version of HARP, which may encompass homeowners without Fannie Mae or Freddie Mac affiliation. This program is designed to reduced homeowner annual mortgage payments by $3000.
For qualifying homeowners, HARP 2 is a godsend. If you have an underwater mortgage, be sure to consider a HARP loan.