Fannie, Freddie Loosen Refinancing Guidelines

First it was plummeting home values, then governmental mortgage reforms slowing down refinancing. They combined to shut most homeowners out of this year's record low interest rates. If you didn't have 20 percent equity, and a 740 score, you weren't getting the benefit of the Federal Reserve's purchase of $1.25 trillion of mortgage backed securities. Well, with 6 months to go in the program, relief has finally come.

Freddie and Fannie have dramatically relaxed their requirements for homeowners with average to good credit scores to refinance with the new HARP program. HARP stands for Home Affordability Refinance Program. The biggest advantage of this program is that equity is no longer required, and even homes worth significantly less than their current mortgage balances may be refinanced. Just last week, it was announced loans up to 125 percent Loan To Value (ie: a $125,000 mortgage on a home worth $100,000) are now eligible.

There are two separate sets of guidelines for this program, depending on whether your loan is securitized by Fannie Mae or Freddie Mac. The combination of credit scores and equity determine the loan's interest rate, which can currently be as low as 5.25 percent with no origination or discount points. Rate can vary by as much as 1 percent depending on your credit score and home's equity.

If you have a Fannie Mae loan, Fannie's underwriting program (Desktop Underwriter) determines such details as income verification needed (pay stubs, or W2's, or tax returns) and whether an appraisal is required or not. With Fannie, you must qualify for the loan based on your current income and debt. You must also be able to prove your income and assets. Any lender can do a Fannie HARP loan on any property, you needn't do through your current lender.

If your loan was sold through Freddie Mac, the rules are much less stringent. No pay stubs or income documentation is required, in fact, borrowers need not even be employed. No appraisal is required as Freddie uses an Automated Value Model to determine an estimated value of the home. While an AVM may not always be as high as an actual appraisal would be, the uncertainty, cost, and time delay of the appraisal process do not apply. Freddie loans are, as of now, required to go back through their current lender on this program.

Most importantly, both these programs allow refinancing without concerns over private mortgage insurance. PMI is traditionally required when a homeowner does not have 20 percent equity in their home. Owners who currently do not have PMI are NOT required to get it when doing a HARP loan, even if they no longer have 20 percent equity. In addition, those currently paying PMI do not have their premiums go up, even if their equity has decreased.

Second mortgages (or home equity lines) are a particular issue with HARP loans. They cannot be paid off as HARP is strictly a "rate and term" refinance program with no cash out allowed. The second lien holder must agree to "subordinate" their mortgage to the new first lien, and few lenders are granting those subordinations unless a borrower has 30 percent equity including the balance of both loans. Even then it can take weeks or more for the subordination to be agreed to, and additional cost as well. Suffice to say that if you have a second, this program in its current state likely won't help you. There are rumblings that this may change, but that doesn't mean it will!

In short, anyone with a good payment history and credit score who has a current mortgage rate of 6 percent or higher should investigate whether a HARP loan will benefit them. This program is too good to be ignored, especially in today's challenging real estate market!