Personal Finance

Money Matters: Federal HARP program provides help to underwater homeowners

Q. My daughter and her husband are really underwater with their mortgage. They bought a little starter home in 2007 just before the bottom fell out. The value of their home dropped by 40 percent. They live in Chicago so a starter home was still over $300,000. They took out a 30-year $300,000 mortgage and the interest rate is 5.5 percent. They still owe around $250,000. They have tried to refinance but have been declined because, while the housing market has improved, their house is still valued at less than the remaining mortgage. I was talking about their situation at bridge and someone mentioned a federal program you wrote about last year but they couldn’t remember the name. Could you let me know if it is still available and provide some information that I could pass on to my daughter and son-in-law?

A. You should definitely talk to your daughter and son-in-law about this federal program. The program was to expire last year but the Federal Housing Finance Agency extended the deadline for the Home Affordable Refinance Program (HARP) to December 31, 2016. HARP is a federal program that enables eligible homeowners with little or no equity in their home to refinance. In other words, people just like your daughter that are upside down - owing more on their mortgage than their home is worth may be ideal candidates for this program. To be eligible for HARP the minimum requirements include: current home loan must be owned or guaranteed by Fannie Mae or Freddie Mac; the loan must have been originated on or before May 31, 2009; you must be current on your monthly payments and you must not have had any payments more than 30 days late within the last six months and not more than one late payment in the last 12 months; the home being refinanced must be your primary, second home or investment property and the loan to value ratio (LTV) must be greater than 80 percent. LTV is calculated by taking the mortgage balance and dividing it by the fair market value (FMV) of the home ($250,000 mortgage divided by a FMV of $230,000 = LTV of 108.70 percent.

These additional details on this loan program may be helpful. Mortgage rates for a HARP loan are the same as for a traditional refinance. Shop around as you would with any loan to get the best rate. There is no LTV restriction under the HARP mortgage program as long as your new mortgage is a fixed rate loan with a term of 30 years or less. With that said, you may find that some banks are more stringent when it comes to credit scores and LTV ratios than others. So, if you are denied a HARP loan apply with another bank and you may get different results. If you want to refinance using an adjustable rate mortgage your LTV must be 105 percent or lower. HARP loans are limited to one time per home. If a current loan doesn’t require private mortgage insurance (PMI) because you made a 20 percent down payment, the new HARP loan won’t require it even though you are underwater. If you have PMI on your current loan, these payments will not increase. You can use the HARP program for a former residence even if it is now rented.