I Want To Refinance But My Home Didn’t Appraise For What I Paid. What Should I Do?

Have you been sidelined from today’s low refinance rates because your home appraisal is too low? Being underwater in your mortgage is not a good feeling, especially when you could be paying hundreds less after refinancing. Here are several options for underwater homeowners to help you get right-side up in that underwater mortgage loan.

Your Home Appraisal & Ability To Refinance

What is a mortgage refinance home appraisal? When prospective lenders order an appraisal for your refinancing application they are looking for the a monetary value to your home, considered its fair market value if you were to sell.

The appraisal helps lenders determine if you overpaid for your home based on the value of comparable homes in your area. If you overpaid for your home when you purchased or because the local market took a nose-dive, the risk for lenders refinancing your home skyrockets.

Mortgage lenders are all about managing their risk when lending and your home’s appraisal is one factor used in determining your eligibility for refinance rates.

There are several kinds of home appraisals ranging from electronic to a walk through performed by a licensed home appraiser. Fully electronic appraisals rely on a sales comparison approach. The computer looks at the sales of homes in your area with similar characteristics.

These characteristics include physical aspects like the number of bedrooms, bathrooms, how old your home is and the square footage. The quality of your neighborhood matters as similar homes with different schools may be more desirable than yours. If the lender is relying on an electronic appraisal it’s easy to see how you’re not getting credit for things like finishing your basement or your home’s curbside appeal.

What Happens When My Home Appraises For Less Than I Paid?

When you apply for mortgage refinancing the lender uses your home’s appraised value to determine your loan-to-value ratio. (LTV) This ratio along with your credit score is used when quoting refinance rates.

If you have an unfavorable loan to value ratio, higher than 80%, you might find the refinance rates you’re being quoted are higher than what lenders are advertising. If you’re underwater, meaning your LTV is greater than 100% you’ll find lenders will simply deny your application.

Refinancing Options For Underwater Homeowners

If you have an unfavorable Loan-to-Value ratio there are options including government refinance programs. If your home loan is backed by Fannie Mae or Freddie Mac and they got ahold of it prior to June 1st, 2009 you could be approved for refinancing under the Home Affordable Refinance Program.

If your mortgage is privately held by someone like Wells Fargo your options are limited to cash-in refinancing. This means you’re bringing sufficient cash to the closing table to buy your Loan-to-Value down to 80%. For many underwater homeowners this is simply not feasible due to the amount of cash it would take.

If you fall into this category of underwater homeowner your options are limited until HARP 3.0 arrives. Rumors of changes to the Home Affordable Refinance Program eliminate the Fannie Mae and Freddie Mac requirement essentially allowing anyone with an underwater mortgage to streamline refinance.

HARP 3.0 proposals come and go in Congress but nothing has made its way to the President’s desk. The Home Affordable Refinance Program is set to expire at the end of this year. If Congress fails to act I fully expect the President to extend HARP by executive order. Unfortunately until HARP 3.0 materializes the government is leaving millions of underwater homeowners in the cold.

How To Pay Less For Mortgage Refinancing

The most common mortgage mistake made by underwater homeowners is shopping for an approval. If you’re desperate to refinance and jump at the first approval you get without paying attention to fees you’re sure to overpay.

The Good Faith Estimate makes it easy to compare refinance rates and fees by focusing on page two. Make sure the quotes you’re getting are all for the same mortgage program and ask your loan officer for zero discount point quotes. If you’d like to see how paying discount points affects your payments there is a comparison table on page three.

Requesting zero point quotes from the same mortgage program is the only way to make an apples to apples comparison of refinance rates and fees from different lenders.

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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:


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.

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