Misconceptions May Keep Homeowners From Getting Low-rate Refi's

Millions of homeowners may be missing out on an opportunity to refinance their mortgages at market rates because they don’t know that the government-created Home Affordable Refinance Program (HARP) is available, or because they have misconceptions about how it works.

HARP is one of two programs created by the government to help homeowners stay in their homes. (Home Affordable Modification Program, or HAMP, is the other.) Under HARP, qualified homeowners can refinance their loans into fixed-rate mortgages at rates very close to current market rates. Unlike traditional loans that typically require 20 percent equity in order to avoid expensive mortgage insurance premiums –HARP loans may allow homeowners to refinance even if their homes are worth less than they owe. The maximum amount that can be borrowed is 125 percent of the home’s appraised value.

Some of the current misconceptions surrounding HARP:

1. Only your current lender or servicer can help you with a HARP loan. “Not true,” says Joe Kelly president of YouCanRefi.com. His company is helping homeowners across the country take advantage of HARP. “Unless you are paying mortgage insurance on your current loan,” says Kelly, “you can probably find another lender who would be more than happy to help you try to refinance under HARP.” Kelly points out that mortgage insurance is not homeowner’s insurance, but is a premium borrowers may be required to pay when they get a loan with a low down payment or less than 20 percent equity.

2. A home affordable refinance loan will hurt your credit. In fact, HARP loans are reported no differently than traditional mortgage refinance loans. Consumers who are worried about damage to their credit ratings may be confusing HARP with HAMP , the Home Affordable Modification Program that aims to reduce monthly payments.

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3. You must have great credit to qualify. Also not true. In fact, there is no minimum credit score requirement, though some investors set a minimum score (a FICO score of 620 is the most common minimum, according to Kelly).

4. You can’t refinance if you have a second mortgage or home equity loan. It’s not necessarily a deal-breaker “as long as the holder of the second is willing to take second position behind the new loan, ” reports Kelly. He says most lenders are willing to do that because HARP improves the affordability of the mortgage. (When a homeowner defaults on a mortgage, the junior lienholder may get little or nothing at all.)

To potentially qualify for a one of these loans, you must be:

The owner of a one- to four-unit home with a loan owned or guaranteed by Fannie Mae or Freddie Mac. (See “How do I know if my loan is owned or has been guaranteed by Fannie Mae or Freddie Mac?“)
Current on mortgage payments (i.e. have not been more than 30 days late on your mortgage payment in the last 12 months; or, if you’ve had the loan for less than 12 months, you have never missed a payment).
Able to make your new mortgage payments, demonstrating a reasonable ability to pay.

The loans themselves are not made by the government, and they are not FHA loans. That means that standard loan underwriting standards will apply. Self-employed borrowers, for example, will need to document qualifying income. Home Affordable Refinance Program loans are available through any lender approved to do business through Fannie Mae or Freddie Mac.

Kelly says that some of his clients have complained that when they tried to contact their current lender or servicer about the program, they often couldn’t get through to find someone who could help them. He speculates that this may be due to understaffed servicers who are busy fielding calls from borrowers in need of loan modifications. Kelly also points out that there may not be a whole lot of incentive for a lender who is collecting payments at a higher interest rate to help borrowers lower it.

Notably, the government’s own website acknowledges the difficulty in finding a lender to process these loan applications with the following advice:

Please be patient yet persistent. Your lender could be handling a large volume of inquiries about the program and it may take some time before they are ready to process your application.

HARP is set to expire in June 2011, which is why Kelly is trying to get the word out that his firm is helping consumers qualify. “This is one of the best programs since sliced bread,” he says, ” but right now it’s set to expire. That means you really need to get the process started by April 2011.”

Update: The Home Affordable Refinance Program has been extended through June 2012.

Image by TheTruthAbout, via Flickr