Monday, October 11, 2010

Playing the HARP - How to Benefit from a Federally Subsidized Mortgage Refinance

This article was first published in May 2009, when the HARP program was brand new.  There have been a few changes since then, including extending the program to cover 125% LTV loans (loans up to 125% of the current appraised value) although these may be difficult or impossible to actually obtain in the real world. If you are interested in refinancing a 1 - 4 unit residential property in California, you may contact me directly at

As a mortgage broker in the state of California I now have access to two new Home Affordable Refinance Programs (HARP), which were recently made available by federal legislation passed in February, the "Helping Families Save Their Homes Act".  This was announced in March 2009, and finally implemented by mortgage lenders in April 2009, as a part of the 2009 Stimulus Act.

There are two separate programs, one which you may qualify for if Fannie Mae holds your current mortgage, and the other if Freddie Mac holds your mortgage.  I will not do a point by point comparison of the two programs, because your existing mortgage can only be eligible for one or the other, and they are not interchangeable.

You may not be eligible for either program if your mortgage is held by a private party, small bank or credit union, and even if your loan is held by Freddie Mac, you may not be eligible depending on whether or not your loan servicer has chosen to participate in the program.  I have personally seen more than one borrower declined for the program even though their mortgage was held by Freddie Mac and the servicer was participating in the program.  There was no explanation offered by the lender for declining either borrower.
Having said that, I believe that well over 25% of the mortgages in the USA are eligible for refinancing under the HARP programs, and many homeowners that do not qualify for a conventional refinance will be able to benefit greatly from the refinance opportunity provided by these programs.

This article will cover in detail the Fannie Mae DU Refi Plus program. The Freddie Mac Relief Refinance Program is similar.  Since Fannie Mae holds about three quarters of the conforming mortgages in the USA, far more people may be eligible for the benefits of refinancing under the Fannie Mae DU Refi Plus program.

The information presented here is from my own personal experience as a mortgage broker, and the published guidelines from Fannie Mae and Freddie Mac.

You should try to find a conscientious mortgage broker who will read the guidelines carefully in advance.

There are many fine points involved in these programs, so be sure to consult an experienced mortgage professional.  Each lender may have their own variations on the general program guidelines.  I can cover the highlights here, but not every detail.

Most of my direct knowledge of the program guidelines come from Wells Fargo Bank’s version.


Here are the major benefits of the Fannie Mae DU Refi Plus program:
1.    Refinance from 80% up to 105% LTV, with no limit on CLTV
2.    No new mortgage insurance required
3.    No limit on financed closing costs
4.    Appraisal might be waived
5.    No reserves required
6.    No maximum debt ratio (with DU approval)
7.    Your loan may be placed with any Fannie Mae approved lender
8.    No limit on number of financed properties
9.    Mortgage payment can increase if borrower is realizing other benefits
10.  The subject property may be currently listed for sale


Here are the major restrictions on the Fannie Mae DU Refi Plus program:

1.    No cash out is allowed (borrower cannot receive more than $250 at closing)
2.    New loan amount can go up to conforming maximum of $417K on a single family residence in certain areas.  Program guidelines allow for up to $729,500 in some areas, but individual lenders will probably not allow you to exceed $417K.  Check with your mortgage broker to confirm maximum loan amount in your area.
3.    New loan must benefit borrower, either by lowering the monthly principal and interest payment, shortening the loan term, or changing to a fixed rate
4.    Borrower must qualify under conventional guidelines (must be approved by DU and provide all documentation required by DU)
5.    No new secondary financing is allowed, and existing secondary financing must be subordinated (kept in place), or paid off with borrower’s own funds.  Second mortgage cannot be paid off with the new first.
6.    No 60 day late mortgage payments allowed during the previous 12 months
7.    None of the original borrowers may be removed from the new loan
8.    All loans delivered to Fannie Mae after February 28, 2009, FHA, VA, second mortgages, and reverse mortgages are ineligible, and some lenders may not refinance subprime, ALT-A, Expanded Approval, and other loan types under this program
9.    Loan term may not be lengthened
10.    Standard add-ons to the fee apply to condos over 75% LTV
11.    Standard add-ons to the fee apply to 2 to 4 unit properties
12.    Add-ons to the price for non-owner occupied properties make the program unattractive for refinances above 75% LTV.  Standard add-ons still apply at or below 75% LTV
13.    Add-ons to the fee apply to LTV’s over 95%


 The primary benefit for most borrowers is being able to refinance a property that has declined in value up to an LTV of 105%, which may not be able to meet conventional refinance guidelines.  Current interest rates are near 50 year lows, and a large percentage of homeowners who purchased or pulled cash out in the last five years might be unable to refinance otherwise.
What this means is that a borrower who purchased a $400,000 property with a 20% down payment might be unable to refinance under conventional guidelines if his property value has declined to $300,000 since the purchase.  A conventional refinance at 80% of the property value (80 LTV) would now qualify the borrower for a maximum loan amount of $240,000 with no mortgage insurance requirement.  The borrower would need to come up with $60K to $80K out of pocket, plus closing costs to qualify.

Under the Fannie HARP refinance program, the loan could be made at 105% of the current property value, or $315,000 with no pricing add-ons to the fee up to 95%.

If the principal balance of the original $320K loan had been paid down to $310K since the purchase, it would leave $5K that could be used for financing the closing costs.

Borrowers are allowed to use their own funds to buy the new loan amount down to 105% in order to qualify, if the property is too far underwater (above 105%).

Mortgage refinances that exceed 80% LTV because of declining property values would normally be subject to the added expense and further complicated by the requirement to add mortgage insurance, which is eliminated under the Fannie Mae DU Refi program.

Loans with existing mortgage insurance would be required to replace it with the same level of coverage, but most lenders would disqualify these properties from using the program.

Consult your mortgage broker if your loan has existing mortgage insurance.
Mortgage insurance only protects the lender, and has no benefit to the borrower.

Since there is no limitation on combined (total) LTV, the borrower can refinance his first mortgage up to 105% of current property value, regardless of the size of any current second mortgage, but the second mortgage must be subordinated (kept in place) or paid off from the borrower’s own funds.  It cannot be added into the new loan.  (The new lender may require the existing second to meet standard guidelines, so not every existing second will qualify for subordination and may be required to be paid off, a deal killer for most homeowners.)

No new or replacement secondary financing is allowed.

So, using the above example, if the borrower had purchased a $400,000 home with a first mortgage of $320K and a second mortgage of $80K (100% financing, zero down payment) which had declined in value to $300K, the borrower could still refinance the first mortgage to a maximum of $315K (105% LTV), and subordinate the second mortgage (keep it in place).
The borrower would have to qualify for the new first mortgage including the payment on the existing second mortgage, which should not be a problem assuming that the borrower’s income has remained the same or increased, the payment is declining on the new first mortgage, and the other monthly debt payments have not increased by more than the savings on the new first mortgage.

Any amount of non-recurring closing costs (points and fees) may be financed in to the new loan amount and any amount of recurring closing costs (property tax, homeowner’s insurance, mortgage interest, etc) plus up to $250 cash back to the borrower can be financed in to the new loan amount, as long as the new loan amount does not exceed 105% of the property’s appraised value.

This enables homeowners that are not pushing the maximum program LTV to buy their interest rate down to the low 4% range, without paying anything out of pocket.

The reality of current lending programs makes only the 15 year fixed, 20 year fixed and 30 year fixed rate loan programs practical and desirable under the Fannie DU Refi Plus program.  Balloon and interest only programs are not allowed and adjustable rates are priced worse than fixed rates.

Here is one point that may not be obvious to most consumers:  there is no cash out allowed on this program.  What that means is:

1.    Any amount of closing costs can be financed in and not be considered a cash out loan.
2.    The borrower can receive a maximum of $250 in cash at closing and not be considered a cash out loan.
3.    Even if the borrower is receiving no cash at the closing and paying all closing costs out of pocket, the new loan is ineligible for the program, and considered a cash out loan, if any new second mortgage has been taken out in the past twelve months before the new loan closes,
    An advance has been made from any existing equity line of credit on the property within the last twelve months before the new loan closes.

The first step is to find out if your loan is currently held by Fannie Mae.  You can go to the following link:

If Fannie Mae holds your current mortgage, any mortgage broker can place your refinance at any Fannie Mae approved lender.

Here is a link to frequently asked questions about whether your existing loan qualifies for the Fannie Mae DU Refi Plus:

If Fannie Mae does not own your mortgage, you can try the following link to see if Freddie Mac owns it:

Here is a link to frequently asked questions about whether your existing loan qualifies for the Freddie Mac Relief Refi program:

Unfortunately, you may not be able to use the Freddie Mac Relief Refi program if your current loan servicer has decided not to participate,  EVEN IF FREDDIE MAC OWNS YOUR MORTGAGE.  Unlike Fannie Mae, this program requires you to refinance the loan through the original lender, either directly or through a broker.

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