At the beginning of the housing debacle when home prices plummeted, soon home owners discovered that in many cases they owed more than what their property was actually worth.
Yet there are options available to many of these borrowers that can help them reduce their monthly house payment, freeing up additional cash. If the borrower holds a mortgage that was generated using subprime or alternative guidelines, they still don’t have the options that others do. But if the borrower’s mortgage was a VA, FHA, USDA or conventional loan, refinancing is a reality by using the right program.
HARP 2.0 Underwater Refinance
As long as the existing conventional loan is owned by Fannie or Freddie, the mortgage is HARP eligible. HARP stands for the Home Affordable Refinance Program and was originally introduced in 2009 and tweaked in 2012, opening up opportunity for more homeowners to take advantage of the loan.
There is often no appraisal requirement which means the mortgage amount may be greater than the existing value. There are typically minimum credit score standards, and you have to supply income documentation, which makes HARP a little different than other underwater mortgage options.
For those whose loans are not owned by Fannie or Freddie and not a VA, FHA or USDA mortgage must have equity in their homes in order to refinance. At least at this stage as a future version of HARP is being discussed to allow for those with alternative or subprime loans to refinance to a lower rate. Still, the bulk of homeowners today can take advantage of a streamline of some fashion as these mortgage programs make up the vast majority or all existing mortgage loans in today’s market.
The VA Streamline: No Appraisal = Home’s Value Doesn’t Matter
VA loans are a popular choice for those who qualify because the Veteran can finance a home with no money down. Yet that also means there is little to no equity in the home at the outset. Most conventional refinance programs require at least a 10 percent equity position, more if the property isn’t the primary residence. Yet the VA offers the Interest Rate Reduction Refinance Loan, or IRRRL. The IRRRL, typically referred to by lenders as the VA streamline is a refinance program allowing a borrower with an existing VA loan to refinance into another VA loan without consideration for the appraised value.
The VA streamline doesn’t require very much documentation. There is no verification of income or minimum credit score required, although many lenders impose a minimum. The only evidence of timely payment occurs when the lender verifies the home owner has no payments more than 30 days past the due date over the previous six months and no more than one late payment over the past 12 months. And because an appraisal isn’t needed, there is no concern about how much the borrower owes compared to the current value.
FHA Streamline: Powerful Underwater Mortgage Option
Like VA loans, the FHA program has its own version of a streamline that is much easier to qualify for compared to the same loan program used to purchase the home.
The existing loan must be an FHA product and must meet a few standards but those standards aren’t many. There is no appraisal requirement, and many lenders don’t require income documentation. That means you could qualify even if you’ve experienced a reduction in income since you bought the home.
The FHA streamline loan must provide the borrower with a “net tangible benefit” with evidence that the new FHA loan is a true benefit to the borrower. This mortgage litmus test asks that the new payment be lowered by at least five percent or the borrower is refinancing from an adjustable rate mortgage to a fixed rate loan.
USDA Streamline: The Newest Underwater Mortgage Option
The most recent streamline refinance option to become available is the USDA streamline. It’s currently in a pilot stage, available for current USDA mortgage holders in 34 states. The likelihood the expansion will depend on the program’s popularity.
The USDA streamline does not require an appraisal or income verification. As far as credit, a minimum score may be imposed by some lenders, as well as a check that you have had no late payments that were more than 30 days late over the immediate 12 month time frame. The home must be the borrower’s primary residence and the existing loan must also be a USDA backed mortgage.
These four types of loans are the main underwater mortgage refinance options. Really it’s quite amazing that lending organizations like Fannie Mae, Freddie Mac, FHA, and others, are allowing people to refinance even when they owe more than the property is worth.
Take advantage of these underwater mortgage programs by locking in your rate here while interest rates are still low.