A loan-to-value ratio (LTV) compares the amount of money you owe on your home to its value and then expresses it as a percentage. If your loan to value is greater than 80 percent, you would traditionally have a difficult time purchasing or refinancing a home, or lenders would charge you higher interest rates. Recent changes in the guidelines for government-sponsored programs has now made it easier than ever for homeowners to refinance their homes, even if their LTV is too high for conventional lenders.
What Is the HARP Program?
During the housing crisis of 2008, many homeowners watched their home equity vanish and loan-to-value ratio skyrocket as home values tumbled. For those who had taken out subprime loans and could no longer afford the payments, refinancing was not an option and they wound up losing their homes.
In response to the wash of foreclosures that swept the nation, the government implemented a program that allowed homeowners to refinance, even if their loan-to-value ratios exceeded the magic 80 percent. The Home Affordable Refinance Program (HARP) went into effect in 2009, and by 2015, it had undergone several changes that allowed more homeowners to take advantage of it.
What Is the Loan-to-Value Cap for a HARP Loan?
When HARP was rolled out in 2009, it had an LTV cap of 125 percent, which was designed to help homeowners with underwater mortgages. The term “underwater” simply means that the borrower’s mortgage principal balance exceeds the home’s value. Since housing prices had fallen so dramatically, there were still millions of homeowners who couldn’t qualify for HARP because of the cap. In 2012, the FHFA introduced HARP 2.0. The primary change to the guidelines at this point was to eliminate the LTV cap to enable more people to qualify for the loan.
How Can a HARP Loan Help Me?
When you refinance into a HARP loan, you have the opportunity to secure lower interest rates which will reduce your monthly payments. In fact, homeowners who refinanced with a HARP loan saw monthly savings on their mortgage payments of roughly $250. You’ll also be able to choose your loan term so that you won’t have to start all over again with a 30-year mortgage. This will help you to start building equity in your home more quickly than you could have with your mortgage.
HARP closing costs are also lower than a conventional refinance. There’s less paperwork, no appraisals or underwriting and lower fees for borrowers to choose shorter mortgage terms. Even if you have a balloon or adjustable mortgage with your existing loan, HARP will roll you over into a stable fixed-rate mortgage with payments that will not change over time.
Am I Eligible for a HARP Loan?
As of 2016, the HARP guidelines are fairly simple:
- Your six-month payment history must not show any late payments, and you must not have made any payments more than 30 days late in the past 12 months.
- The home must either be your primary residence, a second home or a qualified investment property.
- The value of the home has decreased since you purchased it.
- Your LTV exceeds 80 percent.
- Freddie Mac or Fannie Mae are the owners or guarantors of your current mortgage.
- You took out your current mortgage on or before May 31, 2009.
There are several other guidelines and Fannie Mae and Freddie Mac may also have their own guidelines overlaid onto these. Generally, if you meet these requirements, you will most likely qualify for a HARP loan.
Is a HARP Loan My Only Refinance Option?
Depending on your loan-to-value ratio, you may have several refinance options to choose from. What makes HARP unique, however, is that you may qualify for a HARP mortgage even if you have little to no equity in your home. Some lenders will refinance mortgages with an LTV of up to 95 percent, but that doesn’t help borrowers whose loans are underwater. While there is no program currently in place that’s equivalent to HARP for FHA, VA or USDA loans, there are some refinance options available.
What If I Have an FHA or VA Loan?
The FHA’s Streamline Refinance mortgage is available for those with an existing FHA loan. While it doesn’t have an unlimited LTV allowance like HARP, it does not require an appraisal and it does allow homeowners to use the purchase price of their home to calculate LTV rather than the home’s appraised value. An FHA Streamline Refinance is also relatively easy to qualify for. It does not require income verification, employment verification or a credit check. The reality of it is that you could be underwater on your mortgage, unemployed and have a poor credit history and still qualify for an FHA Streamline Refinance.
The Veteran’s Administration offers mortgages to certain members of the military at attractive rates, flexible requirements, no private mortgage insurance (PMI) and no money down. Since many borrowers with VA loans started out with no equity in their homes due to the down payment waiver, they were hit very hard during the housing crisis. The VA’s Streamline Refinance program lets borrowers holding VA loans to refinance at a lower interest rate. The requirements are similar to HARP’s with one addition. When you take out a VA Streamline loan, your new payment must be lower than your old mortgage payment. This typically only becomes problematic for borrowers who are replacing an adjustable-rate mortgage (ARM) with a fixed-rate mortgage.
2 Point Highlight
Depending on your loan-to-value ratio, you may have several refinance options to choose from.
When you refinance into a HARP loan, you have the opportunity to secure lower interest rates which will reduce your monthly payments.
