Learn Which Government Refinance Program is Right For You
Looking for help refinancing your mortgage loan? This article discusses government refinance options, Fannie Mae or Freddie Mac loans, which are often referred to as Government Sponsored Entities (GSEs) that back mortgage loans. Depending on your situation, certain government refinance programs will better fit your needs. This article also covers government mortgage loan programs for purchase loans.
In 2009, the Obama Administration created the Making Home Affordable (MHA) program. A 17-page document titled Modification Program Guidelines outlines the 2009 provisions for trial loan modifications. An eligibility MHA questionnaire helps homeowners determine if they may qualify.
This program has two components:
- Mortgage refinancing through Home Affordable Refinance Program (HARP)
- Mortgage modification through Home Affordable Modification Program (HAMP).
There are provisions that also include homeowners with second mortgages (liens) or even third mortgages. HAMP Borrower FAQs and HAMP Servicer FAQs answer basic questions on the program. The Making Home Affordable Program Web site provides eligibility information, how to request a modification, and additional facts.
The HAMP overview page describes succinctly the requirements that borrowers must meet to be eligible. To summarize, HAMP is designed to help homeowners and servicers avoid foreclosure by modifying the terms of the loan to make the mortgage payments affordable for the long-term.
The HAMP qualifying criteria include:
- Borrower is delinquent on their mortgage or faces imminent risk of default
- Property is occupied as borrower's primary residence
- Mortgage was originated on or before Jan. 1, 2009 and unpaid principal balance must be no greater than $729,750 for one-unit properties.
The HAMP overview page contains information about how the program works as well as examples of an application form, IRS 4506 form, and a link to a verification of income checklist.
HAFA alternatives are available to all HAMP-eligible borrowers who:
- Do not qualify for a Trial Period Plan;
- Do not successfully complete a Trial Period Plan;
- Miss at least two consecutive payment during a HAMP modification; or,
- Request a short sale or deed-in-lieu.
HAFA is complex with numerous guidelines set by the Treasury Dept. These new guidelines do not apply to loans by Fannie Mae, Freddie Mac, FHA or VA because these programs have their own short-sale programs that vary from HAFA.
HAFA provides incentives to mortgage lenders (servicers), seller, and other lien holders. There are deadlines that the mortgage lender and subsequent lien holder have to follow to provide timely progression on the sale of the property. HAFA simplifies and streamlines the short sale and deed in lieu process by providing a standard process flow, minimum performance timeframes, and standard documentation.
A 45-page HAFA Supplemental Directive 09-09: Home Affordable Foreclosure Alternatives – Short Sale and Deed-in-Lieu of Foreclosure Update provides detailed information, including a description of the current guidelines, plus the latest documents you need for the short sale or deed-in-lieu of foreclosure.
As mentioned, servicers need not participate in the government refinance programs, such as MHA, HAMP, or HAFA, though most do. However, the reality of the deadlines depends on the rigorousness of the servicer to implement the provisions.
The Treasury Dept. picked Freddie Mac to serve as the compliance agent and Fannie Mae as program administrator. The guidelines for payments are still under development by Fannie Mae as this was written in 2009.
Regarding credit reports, the servicer still may report to the consumer credit reporting agencies (i.e., Equifax, Experian, and TransUnion) the account as “full file” status. The 45-page document mentioned above contains additional details on the credit reporting.
HAFA for Existing Borrowers (Sellers)
Homeowners selling their homes with a deed in lieu of foreclosure or short sale will benefit from a more streamlined process that includes deadlines the servicers must follow, and a $3,000 payment to cover relocation expenses. Also, borrowers must receive disclosures of costs and net proceeds the servicer requires. The HAFA eligibility requirements are the same as the original HAMP.
The bank or financial institution servicing the mortgage (called a “servicer”) must respond to a reasonable offer within 10 business days of receipt of all the required documents including the signed purchase offer and Request to Approve a Short-Sale (RASS). The servicer still has the option to reject the offer. However, this timeline will improve the chances of the borrower and purchaser to finalize the sale quickly.
Closing will occur in no less than 45 days, unless all parties agree to a shorter timeline. The most important provision for the borrower is that if the servicer participates in the HAFA program, and the first and second lien holders accept the incentives, then there can be no deficiency judgment. As with any other debt forgiveness, the servicer will issue any deficiency on IRS Form 1099C and may be taxed as income. As mentioned previously, see the Bills.com resource Mortgage Forgiveness Debt Relief Act to learn how to avoid taxes on forgiven mortgage debt.
HAFA for Purchasers (Buyers)
Read the supplement directive mentioned above for the program terms and conditions for purchaser obligations.
For example, the sale and purchase must be an “arms-length” transaction, which means that the buyer and seller must not be related by marriage, family, or commercial enterprise. The buyer also agrees not to sell the property for 90 days after closing. The 10-day time period is a great improvement because it has been common for purchasers to wait months for servicers to review offers.
The Home Affordable Refinance Program (HARP) allows home owners to refinance their existing mortgages to current low interest rates. It is designed for homeowners who are current on their mortgage payments but are unable to refinance to a lower interest rate because their home values have decreased.
Homeowners may be eligible if their first mortgage balance does not exceed 125% of the current market value of the home. For example, if your property is worth $200,000 but you owe $250,000 or less on your first mortgage, you may be eligible.
A HARP loan can be a good choice, as they often have very low fees. Be sure to find out if you will be obligated to purchase Private Mortgage Insurance.
Review the current Making Home Affordable web site, when considering the sale or purchase a property subject to HAFA to see if any recent changes to HAMP or HAFA effect you. The HAMP Web sites also provide current and reliable information.
Other government refinance programs are offered through the FHA, the Federal Housing Administration, offers. The FHA offers several loan programs, some for borrowers seeking to purchase and some for refinancing a current loan. FHA loans are secured by the FHA; the FHA guarantees the loan, so the lender is protected in case the borrower defaults on the loan.
A major benefits of an FHA purchase loan is that it requires a small down payment, as little as 3%, far less than what standard loans require. FHA loans do limit how much can be borrowed, however, with different loan limits based on the area in which you live. Usually, FHA loans allow you to borrow less than the average cost of a home in your area.
Other pluses of the FHA programs are that they do not require excellent credit. A borrower has to have decent credit to qualify, but the qualifying criteria are far more flexible than in a standard conventional mortgage. In fact, FHA loans are often ideal for a person with less than excellent credit, who will likely be able to find better rates elsewhere. Another positive of an FHA loan is that there are no pre-payment penalties on an FHA loan, which is also great for subprime borrowers, who normally be directed to loans that have a pre-pay penalty. FHA loans also allow a borrower to use gift money for a down payment, whereas standard loans usually require that money be “seasoned” (have existed in the borrowers bank account) for a period of time.
A negative of FHA loans is that the FHA requires the borrower to pay for MIP (mortgage insurance premium), an upfront cost of 1.5% for purchase loans. Another negative of FHA loans is that the borrower still needs to have a good debt to income ratio to qualify. The debt to income ratio required is slightly stricter than a standard loan. Also, because of the FHA loan limits, a borrower may find that an FHA loan does not provide enough money to purchase the desired home.
FHA Streamlined Refinance
An FHA streamlined refinance is given its name because the borrower and lender have very little paperwork. Sometimes, no appraisal is required. Only a home loan that is already an FHA loan is eligible for an FHA streamlined refinance. The loan must be in good standing and the new loan has to lower the borrowers monthly payment. To qualify for a Streamlined Refinance your original home loan must be an FHA loan in good standing and the refinance must lower your monthly interest payments.
Government loan programs are not static. New programs are introduced and existing programs are modified. It pays to keep informed by reviewing what is available periodically.
See the Bills.com refinance savings center to receive no-cost, no-gimmick quotes from pre-screened mortgage refinance providers.