The U.K.’s vote to leave the European Union on June 23 has opened a window for U.S. consumers to refinance their mortgages as rates have dropped. With rates nearing historic lows, there has been a reported increase in the number of refinancing applications the past few weeks after Brexit.
Refinancing helps homeowners lower their interest rates and payments, save money, and build equity in their homes. And if your home’s value has declined due to the housing bubble, you may all the more want to consider refinancing now.
What is an underwater mortgage?
Also called negative equity, an underwater mortgage is when you owe more on your mortgage that what your house is worth on the market. In the past, refinancing underwater mortgages is difficult with options limited by equity requirements, among other things.
Nowadays, there are several refinancing options available to homeowners who have underwater mortgages or at the risk of straying into that path. These programs, with their relatively lax qualifying requirements discussed below, are:
1. Home Affordable Refinance Program® (HARP®)
2. Home Affordable Modification Program (HAMP)
3. FHA Short Refinance for Borrowers With Negative Equity
4. FHA Streamline Refinance
5. VA Interest Rate Reduction Refinance Loan (IRRRL)
This program was introduced in 2009 targeting responsible borrowers with little or no equity in their homes. By “responsible”, it means no late payments for the last six months and no more than one delinquent payment for the last 12 months before applying for HARP®.
Homeowners can refinance using HARP® “regardless of how far their homes have fallen in value,” as whatHARP®’s website says. The program requires LTV or loan-to-value ratio to be greater than 80% with no ceiling limit. HARP® will end on Dec. 31, 2016.
HARP® is applicable to mortgages owned or guaranteed by Fannie Mae or Freddie Mac. Check your loan’s eligibility with any of these tools: Fannie Mae’s Loan Look-up Tool and/or hotline 1-800-7-FANNIE and Freddie Mac’s Loan Look-up Tool and/or hotline 1-800-FREDDIE.
Technically a loan modification program, HAMP aims to help “delinquent and at-risk” borrowers reduce their monthly payments. They are those who are not able to make their mortgage payments even with the prospect of a refinance.
To qualify, you must show some financial hardship that will put your mortgage in “imminent danger or default.” This can be foreclosure, a pending litigation involving the subject mortgage, or active bankruptcy. Borrowers with a workout arrangement may also apply.
The program will end on December 31, 2016. Aside from mortgages owned by Freddie Mac and Fannie Mae, the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture Rural Housing Service (RHS) mortgages are allowed as per each agency’s guidelines.
FHA Short Refinance
This program is for non-FHA loans, targeting borrowers who owe more than their house is actually worth. It permits your lender to reduce your outstanding principal balance by at least 10 percent.
A FICO credit score of or greater than 500 is required and property must be occupied as a primary residence.
A borrower must qualify for a new loan under FHA standards. He/she must have a current existing current mortgage or have completed a qualifying three-month trial payment plan.
FHA Streamline Refinance
If you are current on your FHA loan and owe more mortgage debt than your property’s value, FHA Streamline Refinance is for you. It is for homeowners who have regularly made at least 12 months worth of mortgage payments.
It allows for “streamlined” underwriting process, requiring limited documentation from borrowers. It also does not require an appraisal and does not mind how high your LTV ratio is.
Cash-out exceeding $500 is prohibited under FHA Streamline Refinance. It is also not applicable to those who have just finished refinancing for the last 210 days.
VA’s IRRRL is a VA to VA refinance, which makes possible a “no money out of pocket” refinancing for applicable transactions. By refinancing, you obtain a lower rate to reduce your payments or go for a fixed-rate mortgage, which may have a higher interest rate.
IRRRL requires the loan to be refinanced as current with no 30 days or more past due payments during the loan closing. For occupancy, you just need a certification that you previously occupied the property.
Refinancing an existing VA loan under the IRRRL commands a lower fee — generally 0.5% of the total loan amount and can be added to the loan balance.
In addition to the above federal programs, a local refinancing program to help underwater homeowners will be launched by the Illinois Housing Development Authority.
Beginning August 1, I-Refi will offer up to $50,000 assistance so homeowners can reduce their mortgage principal and refinance each underwater loan into a “new affordable loan”.
To qualify, homeowners must be current on their mortgage payments and meet certain income and credit requirements.
Got Turned Down for Refinance?
Those government-backed programs feature simpler guidelines and underwriting so more qualified borrowers can refinance. If you were once turned down for refinancing, don’t be afraid to look for another lender to help you.
Get matched with any of our local lenders today.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.