Reducing Your Monthly Payment When Your Existing Mortgage is Underwater

Many clients come to me complaining that they’ve been trying to get a loan modification for years and they keep getting denied. All they want to do is reduce the interest rate on their current loan. When property values declined and they found they were upside down on their debt, lenders told them they weren’t eligible for regular refinancing options. When they contacted their loan servicer to be considered for a loan modification, they learned they were not eligible for the program because they had not undergone financial hardship and were making timely payments on their mortgage. While the rest of the country was able to refinance into new loans with lower monthly payments, these borrowers were stuck with higher payments.

They’d ask, “What are we supposed to do? Stop paying our mortgage so that we qualify? This doesn’t make sense.” No, it doesn’t make sense and there is a solution. In 2009, the Home Affordable Refinance Program (HARP) was developed exactly for this transaction scenario.

The HARP program has many, many benefits:

  • If you are underwater and are seeking a fixed rate loan, there are no limits to loan-to-value with your current servicer. That means if you owe $400,000 and your home is worth $200,000, your current mortgage servicer won’t care about current value because they already hold the debt.
  • When you are refinancing with your current mortgage servicer, there is no minimum credit score required to establish eligibility. When you are refinancing with another lender, and your payment is increasing by more than 20%, you must have a minimum representative credit score of no less than 620.
  • Significant derogatory events such as bankruptcy, foreclosure and judgments are not considered in eligibility. However, the mortgage delinquency policy must be met for the subject property. This means that you could be delinquent on a loan for another property and still be eligible for HARP on the subject property where you’ve not been delinquent for, at a minimum, the preceding 12-month period.
  • When your payment change is less than 20%, there is no cap to the debt-to-income ratio. This means that as long as the lender can verify that you have a source of income, it doesn’t matter how much your liabilities are in comparison to your income. When the payment will increase by more than 20%, the maximum debt-to-income ratio allowed is 45%.
  • The lender is not required to review project eligibility standard for condominium’s since Fannie Mae already holds the risk. This means that a project that Fannie would otherwise deem unacceptable due to for example, high delinquencies or investor profiles, may still be eligible for the HARP refinance.

When the program initially rolled out, the occupancy on your existing mortgage (primary, second home, investment) and the occupancy on the new mortgage had to be the same. Under current guidelines, because the loan represents existing Fannie or Freddie risk, there is no requirement that the occupancy has stayed the same.

You may shop for this loan program with any lender. however in many cases, due to individual lender overlays (tighter lending restrictions), loan eligibility is structured so that it makes it a whole lot easier for you to get approved for refinancing with your current lender or mortgage servicer. The servicer of your mortgage is the company to which you write the monthly checks. The investor on your mortgage is the company that actually holds the note. Most definitely compare interest rates and closing costs with your loan servicer and with other mortgage companies, but also be sure to ask all creditors what their loan-to-value limitation is on their HARP program as you may be ineligible with one lender and eligible with another. Not all lenders are the same.

You may hate their servicing, but it may be to your advantage to go through your current loan servicer for this particular loan program than to any other lender, regardless of interest rate and closing costs offered because your existing servicer has more aggressive underwriting options as they already hold the risk on the existing note. Who cares if another lender is offering you a .25% lower interest rate when their eligibility standards will prevent you from securing a loan?

The HARP program has been extended several times over the last 5 years and as of this printing, the program is set to expire on December 31, 2015. Check the website for current eligibility standards. As of this printing, the below guidelines are in place for HARP eligibility:

  • The mortgage must be owned or guaranteed by Freddie Mac or Fannie Mae.
  • The mortgage must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009. (I’ve seen loans originated prior to May 31 where Fannie is the investor and the eligibility findings are denied because although the loan was originated prior to May 2009 and it is owned by Fannie, it wasn’t sold to Fannie by the May 31, 2009 deadline.)
  • The mortgage cannot have been refinanced under HARP previously unless it is a Fannie Mae loan that was refinanced under HARP from March-May, 2009.
  • The current loan-to-value (LTV) ratio must be greater than 80%. (If the LTV on the loan is less than 80%, you can apply for a standard refinance product.)
  • The original loan was not an Alt-A mortgage:
    SISA loans (Stated Income, Stated Assets)
    SIVA loans (Stated Income, Verified Assets)
    Lo-Doc loans (Low Documentation Loans)
    No-Doc loans (No Documentation Loans)
  • At the time of refinance application and up until loan closing, there can be no late payments on the mortgage for the preceding 12 month period.
  • Depending on certain loan attributes, reduced loan documentation may be acceptable to the lender.

You can determine whether your mortgage is owned by either Freddie Mac or Fannie Mae by checking the following websites (Be sure to enter your property address EXACTLY as it appears on your mortgage billing statement [pay special attention to condo unit numbers]. If you don’t, you will receive erroneous information regarding eligibility, because the system will not identify your property as a match): or

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