Find a lender, even when your LTV is 125%
There are different reasons you could be looking for a 125 percent LTV home equity loan. You could be looking to consolidate debt or do some home improvements using your home as security. Or, you may be looking to refinance a home that is worth less than it is worth, in order to reduce your interest rate and save money.
Before 2007, lenders expanded the types of loans they made and the borrowers they would lend to. (Do you remember 100% financing for borrowers who did not have to prove their income?) Traditionally, lenders did not offer loans for more than a home's value. However, when real estate prices rose year after year, a number of lenders decided that it was not too risky to lend up to 125% of a home's value.
These loans he were commonly second mortgages that, when combined with a first mortgage , gave homeowners a loan-to-value that exceeded the value of their homes. Lenders charged high interest rates for these loans, far above the rates available on first mortgages, often as high as 13 percent or 14 percent.
For many borrowers, such as those looking to consolidate very high interest credit debt or wanting to finance a home improvement, even a 14 percent interest rate was not discouraging. In part, these borrowers were lulled by the year-to-year rise in their property values. They felt that they could wait a year and then refinance all their mortgage debt into one mortgage at a good interest rate.
This kind of 125 Percent LTV home equity loan disappeared, when the sub-prime mortgage crisis hit. Property values plummeted and mortgage lending rules tightened. Exotic loan options disappeared.
As home values dropped, millions of Americans found themselves in the uncomfortable position of owing more than their houses were worth. In some areas of the country, values dropped so much that people who bought their homes at the peak of the market ended up with homes worth as little as 35-30% of what they owed.
One of the effects of the mortgage crisis has been that interest rates have fallen dramatically. Borrowers who took out purchase or refinance mortgages at the peak of the market were shut out of the opportunity to refinance their underwater properties at the current market rate.
To respond to borrowers' needs, reduce the downward pressure on the housing market, and to boost the economy, the government has rolled out programs to help underwater borrowers.
The Home Affordable Refinance Program was introduced in 2009. Because HARP did not help as many people as hoped, President Obama announced an expanded HARP 2.0 program in 2011. HARP 2.0 kicked into high gear in March 2012. HARP 2.0 is restricted to:
- Mortgages owned or guaranteed by Freddie Mac or Fannie Mae.
- Mortgages that were sold to Fannie Mae or Freddie Mac on or before May 31, 2009.
- Mortgages that were not refinanced under HARP previously(except for a Fannie Mae loan that was refinanced under HARP from March-May, 2009).
According to HARP rules, LTV limits were eliminated, so even the most severely underwater borrowers could refinance at the low interest rates available. However, lenders have been adding their own restrictions, called "overlays." It is not uncommon for some lenders to cap HARP loans at 125% LTV for their current clients and 105% for borrowers they current don't service.
There are some lenders that are offering HARP loans up to 150% and even higher. If you are turned down for a HARP loan due to your LTV, you need to shop around.
FHA or VA Streamline
The HARP program is not the only program available for underwater borrowers who need 125% LTV loans (or greater). Two popular loan programs don't necessarily require your home's value to be taken into account.
FHA Streamline- If you currently have an FHA loan, you can apply for an FHA streamline refinance. Not only is your LTV not an issue, FHA streamline refinance loans have reduced credit requirements, too. You do have to occupy your home as your primary residence to qualify
VA Streamline- If your current loan is a VA loan, look into a VA streamline refinance. A VA streamline refinance is also known as an Interest Rate Reduction Refinancing Loan (IRRRL). IRRRLs re-use your Certificate of Eligibility. You can qualify for a VA streamline loan even if you are not occupying the home, although you had to occupy it to qualify for your original VA loan.