For many, the Home Affordable Refinance Program was an excellent opportunity through a government program to refinance an existing loan into one that which was more affordable. The financial and real estate crisis of the 2000s prompted this program, and while it was discontinued, there are available loan-to-value (LTV) programs which can offer many of the same refinancing benefits.
The HARP federal government program offered an opportunity to refinance for individuals people who had little or no equity – whose homes were “underwater.” While it wasn’t freely available to everyone (there being certain qualifications that the borrower had to fulfill), HARP was instrumental in helping refinance millions of mortgages and help people gain some financial freedom in the process.
Now that HARP is out of commission, there are still low-equity refinance programs to be had, however, through high-LTV offerings from Fannie Mae and Freddy Mac.
How Did HARP Work?
The Home Affordable Refinance Program, also called HARP, allowed homeowners to refinance their home’s mortgage even if they do not have a lot of equity in it. The program was created under the Federal Housing Finance Agency to help people who were able to stay current on their payments but were struggling to build equity or gain value on their property. More specifically, the program’s goal was to help individuals who need to refinance but couldn’t do so because their property’s value had fallen over time to qualify for a refinance that would ease their burden and help them get above water.
What Exactly Is Equity?
The housing crisis revolved largely around homeowner’s inability to build equity because their loans were taken on an overvalued property which fell in value as time went on. In a traditional refinance, a borrower can obtain a new loan to replace their existing loan as long as they have some equity built up in it.
Equity is the value of the amount of the mortgage which has been paid off. For example, if a homeowner purchased their home 15 years ago for $600,000, enough payments could have been made so that they only owe $450,000. The home may be worth $600,000, but in this case, they have $150,000 worth of equity in the home. This $150,000 can be used to borrow against for renovations or another purpose.
However, during the mortgage crisis, people took loans for homes which were overvalued or predicted to increase in value, when the values of those homes sank instead of rising. In the above example, they may have a home purchased for $600,000 and owe $450,000 on it, but their home may now only be worth $475,000 This provides only $25,000 worth of equity instead of $150,000. This made the availability of a refinance or home equity loan difficult or impossible.
How Loan to Value Can Work in Your Favor
Loan to value (LTV) is the amount a lender is willing to lend a borrower, usually expressed as a percentage.
For example, if a property is valued (appraised) at $300,000, here is how much a borrower may expect to borrow based on various percentages of LTV.
- 70% LTV = $210,000 maximum
- 80% LTV = $240,000 maximum
- 90% LTV = $280,000 maximum
- 95% LTV = $285,000 maximum
Generally speaking, the higher a home’s Loan to Value is, the more money a borrower may be able to secure for a refinance or another purpose.
The new programs offered by Freddie Mac and Fanny Mae can help people whose mortgages are underwater to use this higher Loan to Value amount to their advantage.
- Buy a new property with a small or even no down payment
- Possibly completely fund your rehab purchase and project
- Lower your monthly payments or re-amortize the payment
Where Does LTV Come Into Play?
With the Home Affordable Program, a homeowner could request a new loan from a lender if their equity was low or the home was dropping in value. Refinancing allows homeowners to tap into the equity, but it can also provide other benefits. This includes allowing the property owners to secure a lower interest rate, improve their monthly payment, or even reduce how much time it takes to repay the loan. These cost-saving features are to some extent extended by the new federal programs linked here and here.
How to Qualify for the Program
For those who would like to consider their options for refinancing using Freddie Mac Enhanced Relief Refinance℠ Mortgage and Fannie Mae High Loan-to-Value Refinance Option, the process starts with eligibility. These eligibility requirements are slightly different from HARP, but fill largely the same position in the refinance market. They include the following:
Staying Current on the Mortgage
Unlike other programs to help homeowners who are struggling with making payments, the new federal programs are focused on helping those who are current on their mortgage loan but struggling with equity. The homeowner must be up to date on all payments, and they can’t have been late more than 30 days in the last six months, and one or less late payments in the past year.
LTV Ratios
To qualify for the new LTV programs for assistance with equity issues, Fannie Mae and Freddie Mac will require certain values that ensure the people applying are underwater. In addition to providing benefits to the borrower like a reduced monthly principal and interest payment, lower interest rate, a shorter amortization term, or a more stable mortgage product, such as moving from an adjustable-rate mortgage to a fixed-rate mortgage, there are required LTV rations as following:
Minimum LTV Ratios:
Principal Residence
- 1 Unit 97.01%
- 2 Units 85.01%
- 3-4 Units 75.01%
Second Home
- 1 Unit 90.01%
Investment Property
- 1-4 Units 75.01%
Home Loan’s Ownership
It is also important for individuals to verify the ownership of the mortgage. The new refinancing programs based on LTV are available for loans owned by Freddie Mac or Fannie Mae. They are government-backed programs. However, many borrowers do not know whether their loan is owned by these organizations. A lender can help to verify this information.
Having Used HARP and Loan Age
The Fannie and Freddie programs do require that the loan being refinanced has not already been refinanced through the HARP program, which ended in 2018. On the other hand, HARP only allowed it’s users to refinance once, whereas the new programs do not have a limit on uses as long as the qualifications are met.
The final major requirement is the age of the loan. The refinance loan must be no less than 15 months after the original loan’s date. Normally speaking equity is unlikely to be a huge issue before that time, so it’s not a difficult a restriction as it might sound.
Landmark Can Help
Refinancing can be intimidating for anyone, not to mention people who are underwater and can’t rely on HARP any longer. Landmark Mortgage Capital can help. Give one of our friendly loan officers a call today at (949) 577-8703 to check out your options and get started.