The federal government’s Home Affordable Refinance program is designed to help homeowners refinance their mortgages even if they owe slightly more than the current value of their homes. The program could be a boon for some borrowers, though its many layers of rules may resemble one of those maddeningly complex contests that offer valuable prizes to people who complete a maze of special offers.
- The federal government.
- Fannie Mae.
- Freddie Mac.
The program is complicated because the federal government has a top-level set of rules; Fannie Mae and Freddie Mac have their own separate sets of rules; and lenders, loan servicers and mortgage insurers generally have their own rules as well.
Borrowers may well wonder where to begin. Here’s our guide to help you navigate through this labyrinth of rules.
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Federal government Home Affordable Refinance rules
Objective: The federal government’s Home Affordable Refinance program is intended to help creditworthy homeowners whose homes have decreased in value refinance their mortgages to obtain lower interest rates or payments, lock in a fixed interest rate or eliminate onerous loan terms to improve their long-term stability as homeowners.
- The program applies only to loans that are owned or guaranteed by Fannie Mae or Freddie Mac, the two secondary-market mortgage corporations that currently are operated under federal government conservatorships.
- The borrower must be an owner-occupant of a detached house, condominium, duplex, triplex or four-unit residential property. (Fannie Mae’s and Freddie Mac’s rules may allow exceptions to this rule.)
- The borrower must not have made a loan payment more than 30 days late in the last 12 months or missed a payment if the loan was originated fewer than 12 months ago. (Borrowers who are delinquent or have made a payment more than 30 days late during the prior 12 months may qualify for the Home Affordable Modification program.)
- The new first mortgage cannot exceed 125 percent of the current market value of the property. (As of June, the loan-to-value was changed to 125 percent to make more homeowners eligible.)
- If the borrower has a second loan, that loan isn’t counted toward the 125 percent limit. The second loan must remain subordinate to the new first mortgage.
- The borrower cannot take out cash to pay other debts but may be allowed to finance closing costs or obtain small amounts of cash, subject to Fannie Mae’s or Freddie Mac’s rules.
- The interest rate on the new mortgage will be a market rate. Rates may vary among lenders. The borrower may be charged fees, points or other refinancing costs.
- The borrower must have sufficient income to afford the new mortgage payments.
- The new mortgage cannot have a prepayment penalty or balloon payment.
- The borrower’s existing loan balances will not be reduced.
- Borrowers whose existing mortgage is covered by private mortgage insurance, or PMI, will be required to continue that insurance on the new loan. Borrowers who don’t have mortgage insurance won’t be required to obtain it.
- So far, 15 lenders have signed formal agreements to participate in this program. A list of these lenders has been posted on the Making Home Affordable Web site. Other lenders may also offer this program.
- Borrowers are encouraged to gather documents before they contact a lender or loan servicer. Recommended documents include:
- Paycheck stubs or other income-related documents.
- Recent income tax return.
- Information about any second loan secured by the property.
- Account balances and monthly minimum payments on credit cards, student loans, car loans and other debts.
- Borrowers are encouraged to complete the short self-assessment questionnaire to obtain a preliminary indication of whether they may be eligible for this program.
- This program will end June 10, 2010, unless that deadline is extended.
- More information may be found at Making Home Affordable. Borrowers should be very careful to consult only the government’s official Web site, as a number of copycat Web sites have sprung up to entrap the unwary. Some sites copy the government Web site and change the telephone number at the top.
Fannie Mae Home Affordable Refinance rules
Objective: Fannie Mae’s Home Affordable Refinance program is intended to help borrowers refinance to reduce their monthly principal-and-interest payment or switch from a risky loan product such as a short-term, adjustable-rate mortgage, or ARM, or from an interest-only mortgage to a fixed-rate mortgage.
- To qualify, the borrower must have an existing mortgage that is owned or guaranteed by Fannie Mae. To find out whether Fannie Mae owns or guarantees your loan:
- Borrowers can apply through any lender that has been approved by Fannie Mae and authorized to offer this program. However, some borrowers may find that they need to refinance through their original lender or loan servicer. (Lenders should refer to “Announcement 09-04: Home Affordable Refinance — New Refinance Options for Existing Fannie Mae Loans” for more information.)
- The new loan may be a fixed-rate mortgage or an ARM with an initial fixed-rate period of at least five years. The payback period may be as long as 40 years.
- So-called “jumbo-conforming” or high-balance loans that meet loan-limit requirements may be eligible.
- Vacation/second-home and investment properties may be eligible.
- The borrower may be able to finance closing costs or take out cash of up to 2 percent of the mortgage amount or $2,000, whichever is less. Fannie Mae’s guidelines state that this cash-out allowance “is intended to provide lenders with operational efficiencies to account for differences in payoff amounts or closing cost items and is not intended to be added to every limited cash-out refinance transaction for the sole purpose of providing cash to the borrower.”
- The borrower cannot take out cash to reduce the balance on or pay off a second loan or home-equity line of credit, or HELOC.
- The borrower must have sufficient income to afford the new loan payments. A verbal verification of employment is required. If the borrower is self-employed, this verification may be obtained from a certified public accountant, or CPA, regulatory agency or other “disinterested third party.” The lender may request a copy of a business license or other form of verification that the business exists. A paycheck stub, recent tax return or other form of income documentation may be required as well.
- No minimum credit score is required. However, borrowers whose credit is impaired may be offered a higher interest rate.
- The borrower must complete a standard loan application.
- An appraisal may be required.
- More information can be found on Fannie Mae’s Web site.
Freddie Mac Relief Refinance Mortgage rules
Objective: Freddie Mac’s Home Affordable Refinance program, known as the Relief Refinance Mortgage, is designed to assist borrowers who are current on their mortgage payments, but would benefit from refinancing into a mortgage that would better position them for long-term homeownership. The program may be used to reduce the borrower’s interest rate, shorten the loan repayment period or replace an adjustable-rate mortgage, interest-only mortgage or balloon/reset mortgage with a fixed-rate loan.
- To qualify, the borrower must have an existing mortgage that is owned or guaranteed by Freddie Mac. To find out whether Freddie Mac owns or guarantees your loan, call (800) 373-3343, call your loan servicer or search for your loan on Freddie Mac’s Web site.
- Borrowers can apply for this program through their current loan servicer or any Freddie Mac-affiliated lender. Borrowers who apply through their current servicer won’t have to have their loan re-underwritten in most cases, but borrowers who switch to a different lender will have to have their loan re-underwritten.
- The new mortgage can be a 15-, 20- or 30-year, fixed-rate loan or an adjustable-rate mortgage with an initial term of five, seven or 10 years. The loan must be fully amortizing (i.e., not an interest-only or payment-option loan). An existing fixed-rate mortgage may not be refinanced with an ARM.
- The property may be a vacation/second home if the existing mortgage was originated as a second-home loan or the borrower now occupies the home as a principal residence.
- The property may be an investment property if the existing mortgage was originated as an investment property or the borrower now occupies the home as a principal residence.
- The existing loan, new loan or both may be a so-called “super-conforming” loan limit within the applicable loan limit for the area.
- If the original loan is covered by mortgage insurance, the insurer must agree to transfer the insurance to the new loan.
- The new loan cannot be used to make a payment on or pay off a second loan.
- Lenders are encouraged to use Freddie Mac’s automated valuation model, or AVM, to estimate the property’s current market value. Borrowers should ask whether a new appraisal will be required.
- Borrowers may be able to finance an additional $5,000 or up to 4 percent of the new loan amount, whichever is less, to pay closing costs, financing costs or prepaid sums due at closing.
- Borrowers whose monthly payment increases 20 percent or more must provide income and employment documentation and have an acceptable credit score and debt-to-income ratio to demonstrate they can afford the new higher payment. (This scenario typically applies only to borrowers who want to refinance an ARM, interest-only or payment-option type of mortgage, which has a very low interest rate.)
- More information may be found on Freddie Mac’s Web site.