FHA Refinance Loans & HARP - What Are They and How Can You Benefit?
Editor’s note: On October 24, 2011, the FHFA announced changes to HARP that remove the 125% LTV restriction for fixed-rate loans. See the Bills.com resource HARP Changes to learn about the loosened requirements.
A federal refinance mortgage can be either a Federal Housing Administration (FHA) refinance loan, or a program called Home Affordable Refinance Program (HARP). These two programs are different from one another. It is important to understand the difference between the two if a homeowner is looking for a federal refinance mortgage. The differences are discussed below.
Federal Refinance Mortgage — FHA Refinance
FHA mortgage loans and FHA mortgage refinances are not loans funded by the Federal Housing Administration, but instead are loans insured by the FHA and made by FHA-approved lenders throughout the United States. FHA mortgage loans and FHA mortgage refinances are intended to help home buyers in lower income brackets. FHA insures mortgages on single family, multifamily, and manufactured homes. FHA insured loans are designed to protect mortgage lenders in the event of a loss due to the homeowner defaulting on their mortgage loan.
FHA Basic Qualification and Eligibility Requirements
With an FHA refinance, underwriting guidelines are less strict than conventional mortgage loans. When a lender reviews an application for an FHA insured loan they will be more flexible when considering household income and debt-to-income ratios. However, an applicant must meet certain requirements that FHA has established in order to qualify. The following are general qualification guidelines, according to The Department of Housing and Urban Development:
- The borrower must meet standard FHA credit qualifications
- The borrower must have a valid Social Security number, lawful residency in the United States, and be of legal age to sign a mortgage contract.
- The borrower is eligible for approximately 96.5% financing. The borrower is able to finance the upfront mortgage insurance premium into the mortgage. The borrower will also be responsible for paying an annual premium.
- Eligible properties are one- to four-unit structures.
- FHA mortgage programs do not typically have maximum income limits, however you must have sufficient income to qualify for mortgage payments and other debts.
- Verification of income, assets, liabilities, and credit history for all borrowers is required.
Streamline FHA Refinance
Streamline FHA refinancing refers to a process that requires less documentation than a traditional refinance. The general requirements for a streamline FHA refinance according to The Department of Housing and Urban Development are the following:
- The mortgage to be refinanced must already be FHA insured.
- The mortgage to be refinanced should be current (not delinquent).
- The refinance is to result in a lowering of the borrower's monthly principal and interest payments.
- No cash may be taken out on mortgages refinanced using the streamline refinance process.
Some lenders offer no out of pocket expenses to a borrower, also known as "no cost" refinancing. However, the "no cost" is offset by charging a higher interest rate on the loan. The borrower may avoid paying out of pocket for closing costs by adding the costs to the loan total loan amount. If a borrower chooses this option they can feel comfortable knowing that it is not typically considered a cash-out refinance. Therefore, a borrower should have no problem completing a streamline FHA refinance.
Federal Refinance Mortgage — Home Affordable Refinance Program (HARP)
The government refinance mortgage program known as the Home Affordable Refinance Program (HARP) allows homeowners facing difficulties refinancing their mortgage through conventional methods to apply for a refinance of their mortgage. A homeowner that is current with their monthly payments but unable to refinance due to a drop in the value is they typical prime candidate for the HARP program. The ultimate goal is to allow a homeowner to do a mortgage refinance that will lower their interest rate and overall monthly payment. The following are criteria outlining eligibility for a government refinance mortgage under the HARP program:
- You are the owner-occupant of a one- to four-unit home.
- The loan on your property is owned or guaranteed by Fannie Mae or Freddie Mac.
- At the time you apply, you are current on your mortgage payments ("Current" generally means that you have not been more than 30 days late on your mortgage payment in the last 12 months, you have never missed a payment).
- The amount you owe on your first-lien mortgage does not exceed 125% of the current market value of your property.
- You have a reasonable ability to pay the new mortgage payments.
- The refinance improves the long term affordability or stability of your loan.
Editor's note: See the Bills.com resource HARP Changes to learn about the changes to HARP announced on October 24, 2011.