The Inigo Montoya Guide to HARP 2.0

The Internet is buzzing with HARP 2.0 news and now inconceivably, HARP 3.0. I’ve been getting a lot of questions along the lines of what is HARP 2.0 and how do I get qualified? If you’re underwater in your existing mortgage HARP 2.0 is the break you’ve been waiting for. Here’s everything you need to know about the government’s changes to the Home Affordable Refinance Program (HARP 2.0).

You keep using that word. I do not think it means what you think it means.

-Inigo Montoya, The Princess Bride

What is HARP 2.0?

The Home Affordable Refinance Program is President Obama’s program, recently modified by Executive Order, to help underwater homeowners take advantage of today’s historically low refinance rates. The fact that the new program is now being run under Executive Order is important because HARP 2.0 is not yet law and will expire on December 31st, 2013.

During President Obama’s State of the Union Address, the President pledged to send legislation to Congress making HARP 2.0 law. The changes outlined in the President’s speech are what people commonly called HARP 3.0. If you remember anything from your high school civics class about how a bill becomes a law, it could be a long time before the program is signed into law.

With that being said, let’s start with the original Home Affordable Refinance Program, judged by many as a dismal failure.

The original Home Affordable Refinance Program was part of the American Recovery and Reinvestment Act of 2009. HARP is intended to allow underwater homeowners refinance their home loans but had too many restrictions to help those that needed it most.

The problem with HARP 1.0 was that if your home’s value was less than 25% of what you owed you could not qualify. Basically if you were underwater you could not qualify for the government program to help underwater homeowners. Sounds like our government at work right? Another problem that is still a part of the new program is that your mortgage must be have been purchased by Fannie Mae or Freddie Mac before 2009. If Fannie and Freddie don’t back your home loan you can’t participate in the new program.

How to Qualify for HARP 2.0

The first thing you need to do is find out if Fannie Mae or Freddie Mac has your mortgage. Fannie and Freddie aren’t lenders; they simply buy home loans to create mortgage-backed securities as a means of propping up our battered economy.

If you’re not sure if Fannie or Freddie guarantees your home loan you can reach a HUD mortgage counselor by calling 888-995-HOPE (4673). If your mortgage is not under Fannie or Freddie you will be unable to take part as the program exists today.

There are tools on the Fannie Mae and Freddie Mac websites that you can use to check your status online at:

www.fanniemae.com/loanlookup
www.freddiemac.com/mymortgage

Your home loan must be backed by Fannie Mae or Freddie Mac before May 31st, 2009 to be eligible.

Next, you must be current on all of your payments for the past six months. The program allows for one late payment over the last year; however, you still have to be current for the last six months. If you refinanced under the original Home Affordable Refinance Program (1.0) you cannot take part in HARP 2.0.

Your home’s loan-to-value ratio must also be greater than 80%, meaning you have less than 20% equity in your home to be eligible. If you’re underwater you don’t have to worry about the loan-to-value requirements.

HARP 2.0 Program Improvements

The biggest change under HARP 2.0 is that the 125% loan-to-value limit is gone. If you’re underwater in your existing mortgage and meet the other requirements you qualify. The improved program also allows for automated appraisals meaning you might not have to pay for one. The automated appraisal is faster and much cheaper, paying for a new appraisal could cost you as much as $500.

The new program also allows for some discounted mortgage refinancing fees. This amounts to a nearly two percent savings on standard closing costs due to the elimination of some risk based fees. These fees are limited to $750 per $100,000 refinanced. Some lenders will allow you roll these fees into your loan balance requiring less cash at closing.

The President included incentives intended to increase lender participation in HARP 2.0. Participation is voluntary for lenders, meaning some lenders will choose not to play. (Some may also choose not to approve your application for any number of reasons) The incentives reduce lender liability and allowing pricing flexibility, meaning lenders can charge you a premium for taking on your home loan. This is why shopping around for the best deal is so important under HARP 2.0.

More good news is the elimination of income requirements. This means you don’t have to document your income unless you’re lengthening your loan term. (Going from a 15 year to a 30 year mortgage) This is excellent news for the recently unemployed.

If you’re considering a mortgage refinance under the new program you will not be required to keep your existing lender. Because the fees you pay closing on any home loan make or break the deal you’re getting you’ll want to shop carefully comparing both refinance rates and closing costs before kicking your existing lender to the curb.

Remember that lender participation is voluntary so smaller lenders like community based credit unions may be more willing to approve your application. Individual lenders have the ability to create their own qualifying rules. While there are no minimum credit score requirements, you might find your lender requires a certain credit score to qualify. If you’re having trouble finding a lender to approve your HARP 2.0 application, a good mortgage broker could match you with a lender willing to take on your mortgage.

There are a few other HARP 2.0 rules that you should know about. One thing the program will not do for you is combine your primary and 2nd mortgage loan. If you’re underwater on a second home or investment property you can refinance as the new program is not limited to your primary residence. Lastly, HARP 2.0 does not apply to VA, FHA, or USDA home loans. These agencies have their own programs for underwater mortgage refinancing.

Beware Unnecessary Fees & Markup

One of the incentives under HARP 2.0 intended to boost lender participation is essentially a license to charge whatever the lender likes when it comes to approving your loan. This is why comparison shopping for refinance rates and fees is so important.

If you overpay the loan origination fee or other closing costs it can be difficult, even impossible to recoup your out-of-pocket expenses. If you never break even on your closing costs you’ll be losing money on the new home loan, no matter how low your interest rate.