If the government wanted to help people with underwater homes, the government would let underwater homeowners buy back their own homes through a short sale. Yes, the government should let homeowners short sale their own homes to themselves. But that's gonna happen when pigs fly. It's just too simple of an idea.
Instead, the government offers basically two options through Making Home Affordable, among a plethora of restrictive programs targeting one or two people who live in Pocatello, Idaho. The two options are:
- Loan modification through Making Home Affordable
- Home Affordable Refinance Program, HARP, through Making Home Affordable
The basic difference between the two programs is loan modifications are for people who have a financial hardship; a Home Affordable Refinance Program is for sellers who can't qualify for a loan modification because they have no financial hardship.
How to Qualify for the Home Affordable Refinance Program
The qualifications for the Home Affordable Refinance Program are relatively straight forward. At first glance, one would think many, many people will qualify, but I suspect that very few qualify for the program. And, of those who do qualify, one might ask why would anybody want to do it, because the program offers more of a BandAid than a real solution.
- Your mortgage must be owned by Fannie Mae or Freddie Mac. Other types of loans do not qualify for the Home Affordable Refinance Program. You can look up your own loan online to see if it is held by Fannie Mae or Freddie Mac by going to the loan lookup tools offered by Making Home Affordable.
- Your loan must have originated prior to June 1, 2009.
- Your loan-to-value ratio must exceed 80%.
- You must be current on your payments, with no more than one late pay in the last 12 months.
- Except for a small window that is excluded, you can't have used the HARP, Home Affordable Refinance Program, in the past.
Facets of the Home Affordable Refinance Program
The main reasons a homeowner would apply for the Home Affordable Refinance Program are because the homeowner wants to keep the home and cannot get a loan modification. Homeowners who would prefer to do a short sale generally do not apply for HARP.
- The refinance program has no limit on the amount of loan you can take out. The previous program had a cap of 125%. Now, it can exceed your home's value by 200% or 300%, it doesn't matter. There is no cap.
- There is a small, limited, cash-out incentive. Generally only closing costs can be added to your loan to increase its balance.
- You can remove a borrower from the loan if the remaining borrower can prove a steady payment history. This would work for a qualifying divorcing couple.
- You can add a borrower to the loan, providing the new borrower can qualify.
- You can refinance if you've filed bankruptcy as long as it was discharged more than 12 months ago and you've been staying current on your mortgage payment since.
- With the exception of one type of HARP program, a minimum credit score and debt ratio is not required.
What is the Problem with Home Affordable Refinance Program?
In many ways, the problem with the Home Affordable Refinance Program is the same problem that plagues the loan modification programs. For starters, they don't help enough people because enough people do not qualify. The guidelines don't fit most people.
- The biggest problem is the program does not reduce the principal balance. In fact, it makes the principal balance even bigger. It's not much different from putting a gun to your head and just not pulling the trigger until you want to sell and can't because you owe too much. It should reduce your debt, and it does not.
- You will continue to pay mortgage insurance if you have it now. Although your payment might decline due to a lower interest rate, your payment might also go up, too. However, Fannie Mae guidelines state if you did not have mortgage insurance before, you will not now.
- You cannot payoff / refinance a fixed-rate second loan or home equity loan through the Home Affordable Refinance Program. The best thing you can do is get that second lender to subordinate, meaning to remain in second position. But there is little incentive for a second lender to agree. Why would a second lender want to jeopardize its position and sink into the well of no equity even further?
- You might change your type of loan to recourse. Laws vary from state-to-state. In California, for example, sellers who refinance are changing the terms of their loan from purchase money to hard money loans.
Generally speaking, purchase money loans carry no recourse in California. If you were to go through foreclosure down the road, if your loans remained purchase money, you could be protected from personal liability in California. Fallout from a refinance such as gaining the right to pursue a deficiency judgment in the event of default can be a big plus for banks and a bad thing for homeowners.
Short Sale vs. Home Affordable Refinance Program
You might ask why not do a short sale instead? What is the difference between a short sale and a Home Affordable Refinance Program? Under the Home Affordable Refinance Program, in two years your home is probably still underwater and worth less than you owe.
Sellers who do short sales can often qualify to buy a home in 2 years. So, they essentially trade an underwater home for a home just like it but with a much smaller mortgage -- except they rent for 2 years first. At the end of 2 years, a former short seller can have the same home but own a home with equity. Is it worth it to move? It might be. Ask your accountant.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.