The Home Affordable Refinance Plan (HARP)

by David Sandberg

In the wake of the mortgage meltdown, the United States government has come up with a number of programs to stabilize the market. While many of the programs, like the Troubled Asset Relief Program (TARP) were aimed at large Wall Street firms, some have attempted to solve the problems that individual homeowners face. The Home Affordable Modification Program (HAMP) that attempted to provide a way for homeowners and lenders to change the terms of existing loans failed to make even a small dent in the problem. In response to this, the Obama administration designed the Home Affordable Refinance Plan (HARP). HARP is designed to let underwater borrowers refinance their loans to take advantage of today’s great rates.

The HARP program is designed to solve the problem of high-interest rate mortgages that are “underwater.” An underwater mortgage is one where the borrower owes more than the property is worth. In most cases, a person with an underwater mortgage cannot refinance since lenders do not want to take the risk of making a loan for more than the value of the house, which is the collateral. Many people in this situation can afford to pay for their home at today’s low interest rates, but will likely lose their homes if they have to continue paying their high-interest mortgages. HARP gives these people a way out by letting them refinance their existing mortgage, regardless of the value of the underlying house.

Not everyone can qualify for a HARP mortgage, though. The program has a number of rules and requirements.

  • Taking out a HARP mortgage must leave you better off. It should lower your payments or, in some other way, be easier to repay than your existing mortgage. This could include transitioning to a mortgage that is paid off in a shorter amount of time, going from an adjustable loan to a fixed one or going from an interest-only loan to one that is designed to be paid off. Many of these instances could actually lead to a higher payment.
  • Your loan must be owned by Freddie Mac or Fannie Mae and must have been sold to them on or before May 31, 2009. Generally speaking, if you closed on your loan before April 1, 2009, your loan will be eligible. If you are not sure if Freddie or Fannie own your loan, you can look it up online at http://www.fanniemae.com/loanlookup/ and https://ww3.freddiemac.com/corporate/.
  • You must be current on your current mortgage with no more than one late payment in the last 12 months and none in the last six months.

Assuming that you meet these standards, you could be eligible for a HARP mortgage refinance. Most major lenders offer HARP refinance plans with very low closing costs and extremely competitive rates. You should shop around, though, because lenders can offer very different terms.

The HARP legislation allows lenders to set their own rules. For example, while the program itself does not require borrowers to have a minimum credit score, most lenders will not make HARP loans to people with FICO scores under 620. Some lenders have also arbitrarily created a limit on the amount that they will lend, capping loans at 125 percent of a property’s appraised value. The same issues come into play with a borrower’s debt to income ratio. Historically, people could only spend a certain portion of their monthly gross income on paying off debt, and some lenders impose these limits on HARP loans even though they do not have to.

Since most of America’s homes carry mortgages guaranteed by Fannie Mae and Freddie Mac, the HARP is potentially available to just about anyone. With easy qualification, low closing costs and excellent terms, a HARP loan is an excellent option for people who want to hold on to their homes and pay less for them. Given today’s low interest rates, you should look into taking advantage of this program before the market shifts.

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