August 23, 2012

Underwater refinance without HARP?

A lot of homeowners with underwater mortgages would like to refinance, but they don’t qualify for HARP (the federal Home Affordable Refinance Program). Do they have other options? 
Surprisingly, yes. There are other ways you can refinance a negative-equity mortgage if you don’t qualify for HARP. Unfortunately, they’re limited to borrowers who are in specific situations. However, more options may be on the way.

It’s actually quite easy to refinance if you’re underwater on your mortgage if the loan is backed by the FHA or VA. Both of these offer what are known as “streamlined” refinancing on mortgages that enable you to be approved for a refinance almost automatically, provided that you’ve kept up with your mortgage payments.
With these types of mortgages, it doesn’t matter how far “underwater” you are on your mortgage – that is, no matter how much the value of your home has fallen below what you owe on the loan – approval is practically guaranteed if you’ve been making regular payments. Credit scores, appraisals, proof of employment – none of these are necessary.
The primary criteria for a VA or FHA streamline refinance are that you be current on your payments and not have missed a mortgage payment in the past 12 months – six months on an FHA loan with no more than one late payment in the past 12.
There are certain limitations – for example, if you have a second mortgage, those must be subordinated to the new loan for the refinance to be approved, and can’t be rolled into the new loan. You also cannot take cash out of a streamline refinance with either the FHA or VA.

A similar streamlined refinance is available to borrowers whose mortgage is a Rural Development Loan through the USDA. However, that is a pilot program that is currently available in only 19 states. Its formal name is Streamlined Refinancing for Rural America.
One of the biggest obstacles to refinancing through HARP is that the program is open only to mortgages that are backed by Fannie Mae or Freddie Mac. That leaves out a lot of mortgages that were originated before the financial crisis that didn’t qualify for Fannie or Freddie backing – such as stated-income loans or option-ARMs where borrowers could initially make monthly payments that didn’t keep up with their accumulated interest.

There are a few options opening up for these borrowers as well. First, under the $26 billion foreclosure abuses settlement the government reached with the nation’s five largest banks, approximately $3.5 billion will be dedicated to supporting refinancing for underwater borrowers with non-Fannie Mae or Freddie Mac loans.
Lenders are contacting borrowers who might qualify for refinancing under the agreement. However, if you are underwater on a mortgage that is not backed by Fannie Mae and Freddie Mac, have kept up with your payments, and your mortgage is handled by Wells Fargo, Bank of America, JP Morgan Chase, Citibank or Ally/GMAC, it wouldn’t hurt to take the initiative and inquire whether you might qualify.

In addition, the administration is asking Congress to approve a program that would allow underwater borrowers with non-Fannie or Freddie mortgages to refinance into an FHA mortgage, provided they are current on their payments. It’s estimated this would give an estimated 3-4 million underwater borrowers who are currently locked out of other programs an way to refinance their mortgages to a lower interest rate.
Though the prospects for such legislation are uncertain, with a election coming up this fall the odds of its passage will depend in large part on the importance legislators of both parties attach to appealing to the votes of frustrated homeowners.


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