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HARP Refinance Basics

Saturday, September 8, 2012 - Article by: Daniel - The Federal Savings Bank - Message

Can a HARP refinance help you?

A HARP refinance, in short, allows you to refinance with expanded eligibility requirements. That could mean that you are allowed to refinance with a higher debt ratio than usually allowed, or a higher loan to value ratio than is usually allowed. That flexibility allows many homeowners to refinance when they otherwise would not be able to. The idea is that even though the new loan might be a risky loan compared to other loans files with lower ratios it is still less risky than just leaving the home owner in their current position. Fannie Mae or Freddie Mac is on the hook for your loan if it's a HARP refinance, so they want to allow you to get a lower payment and be in a position where you are less likely to default on your mortgage.

What do I mean exactly by expanded eligibility?

Well, Fannie Mae and Freddie Mac have what we call Automated Underwriting Systems. Fannie Mae and Freddie Mac each have their own system and they have certain thresholds that are known in the industry. For instance, we know that a total debt ratio of 45% is a very important number. Why? Because if your total debt ratio is over 45% then it gets much harder to get approved. On new loans these systems will both issue approvals up to a 50% total debt ratio but if you are over 45% you need to have what we call "compensating factors" to get approval. With a HARP loan this 45% number is basically thrown out the window and the Automated Underwriting Systems are much more flexible with their approvals. I've seen HARP loans approved over 65% total debt ratio. Now, 65% is a bit on the extreme end and there were other compensating factors but if it wasn't a HARP loan it wouldn't have issued an approval for anything over 50%.

Loan to value ratio is also very important in any loan transaction. If the property is your primary residence then you can have as little as 3.5% equity and you can refinance. If the property is a rental then you'll need 25% equity to get a refinance. These were the normal rules before HARP came into the picture. HARP allows you to be underwater by 25% and still get the loan done. That means instead of having to have equity in the property you can have a property that is worth less than what you owe and still refinance. These are getting approved up to 125% loan to value.

Keep in mind that all lenders have "overlays" that are restrictions their company decides to have that are in addition to any restrictions from Fannie or Freddie. You don't have to go through your current lender to get a HARP refinance done. If you qualify then most lenders can help you. Shop around to find the best rate just like you would with any other refinance. And good luck!

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