During the last few years, recession-battered American homeowners found themselves making uncomfortable choices. Moving to better job markets or sounder economies often entailed leaving underwater homes -- homes that could not be sold without heavy damage to credit ratings, possible lawsuits and other costs. Many of these migrant homeowners rented out these properties, waiting for real estate values to rise so that they could sell.
If you’re one of those homeowners, being a landlord might be a lot less painful if you could refinance into a mortgage with a lower interest rate and payment — one that could be more easily covered by the rent from your tenant. And you might be able to do that with the HARP program for underwater borrowers — it does allow refinancing of investment properties that meet its guidelines.
What are those guidelines?
HARP II for Rentals and Vacation Homes
HARP II isn’t just for primary residences – you can now refinance a single vacation home or a one- to four-unit investment property under the program. To be eligible, a HARP refinance must confer at least one of these benefits:
- A reduction in your interest rate and or your monthly principal and interest mortgage payment;
- A fixed-rate mortgage in place of an adjustable-rate, interest-only, or balloon/reset mortgage;
- A reduction in the term of your mortgage (e.g., from 30 years to 15 years).
To be eligible for a HARP refinance, you must meet all of these guidelines:
- The home must be a 1-4 unit property (investment or primary) or single unit (vacation home).
- You must be current on your loan, with no 30+ day late payments in the last six months, and no more than one in the last 12 months.
- Your loan must have been purchased by Freddie Mac or Fannie Mae before June 1, 2009.
Freddie Mac caps pricing adjustments for its HARP refinance (also called a Relief Refinance Mortgage SM) as follows:
- Zero percent for primary residences with terms of 20 years or lower;
- .75 percent for primary residences with terms exceeding 20 years; and
- Two percent for rental homes (investment property).
Freddie Mac imposes different conditions on HARP loans with new lenders / servicers (this program is called Open Access) than it does for refis with the same servicer. In most cases, those requirements are more stringent – for example, if you work with your current lender, they’ll verify the source of your income or that you have enough liquid assets to make at least 12 mortgage payments. As long as your payment isn’t increasing by 20 percent or more, your debt-to-income ratio won’t be considered, and there is no minimum credit score requirement.
However, if you use a new lender, you will have to provide full documentation of income and assets, your debt-to-income ratio can’t exceed 45 percent and you must have a minimum credit score of 620.
Fannie Mae’s guidelines are very similar to Freddie Mac’s. However, there are some differences, including:
- Fannie Mae’s Loan Level Pricing Adjustments are limited to zero points for loans with terms of 20 years or less, and .75 percent for those with terms exceeding 20 years.
- Fannie Mae’s Desktop Underwriting software examines the file electronically and then issues its documentation requirements and underwriting decision. In most cases, your documentation requirements and qualification needs are lower if you use your current lender.
Shopping for your HARP Loan
So, if your guidelines are less stringent and you need less documentation with your current lender, why would you ever bother with other lenders for HARP refinancing? There are several reasons:
- Pricing – many people like the easy way out, and lenders know this. Present customers with a done deal (“all you have to do is say yes!”) that requires little effort on their part, and a certain portion of them will agree without shopping around. Because of this, the deal a lender offers its existing customers might not be as good as the one it offers a new customer. The only way you’ll find out is to be someone else’s new customer and see how nice they’re prepared to be.
- Timing – pretend for a minute that you are a mortgage lender with a bunch of underwater borrowers. They might be paying six percent, even though today they could get about four percent. How eager are you, the lender, going to be to refinance them and swap those really profitable six percent loans for less-profitable four percent loans? Especially when you have limited resources that could be more gainfully applied to bringing in new customers?
- Overlays – yes, all HARP programs are not created equal. Lenders can and do apply overlays to the guidelines. For example, even though the rules say that you can be 200 percent underwater, many lenders draw the line at 125 percent or even 105 percent. In this case, your own lender might not want your loan, but someone else might be happy to refinance you.
Just as with all refinance mortgages, the only way to know that you aren’t leaving money on the table is to get mortgage quotes from several competing lenders. HARP refinances generally do come with slightly higher rates than traditional refinances, but you don’t want to pay any more than necessary.