Last Updated on March 11, 2021 by Filip Poutintsev
What is a HARP Loan?
HARP loan is also known as the “Home Affordable Refinance Program.” designed by the government to help underwater homeowners. Underwater homeowners are the owner of underwater mortgages that has high loan principle than the free market value of the property or home.
Advantages and Disadvantages of Harp Loan
Since after the end of the financial crisis, the mortgage crisis is no longer top of mind. However, there are still many homeowners who are having trouble paying the mortgage payments. In response to the financial crisis, the Federal Housing Finance Agency in March 2009 introduced the Home Affordable Refinance Program that is HARP loans.
HARP allowed mortgagors or homeowners to lower down their monthly mortgage payments or to pay down the loan faster by reducing the interest rates and allowed them to build more equity.
History of Harp Loans
In 2008, when the housing bubble burst in the U.S, millions of borrowers were in trouble and were having difficulties in paying mortgage payments. As inventories took off nationwide, home prices plunged.
Most of the homeowners felt the value of their home drop below the balance of their mortgages. Later, these homeowners got forbidden from taking benefit of lower interest rates through refinancing. Also, to qualify for refinancing without private mortgage insurance (PMI), banks traditionally require a loan to value ratio (LTV) of 80% or less than 80%.
In March 2009, after the global financial crisis, the Federal Housing Finance Agency created a HARP loan. It got introduced to allow those owners with an LTV 80% without paying for mortgage insurance.
The program was effective on 1st April 2009 and helped homeowners to get stable, affordable, and new mortgages. Later, the HARP loan program got to stretch to those with an LTV of up to 125%. This program got extend in the same year of 2009.
In December 2011, the rule got changed, and “HARP 2.0” got created. The new regulation was, there will not be any limit on negative equity for mortgages up to 30 years. So, even homeowners having more than 125% of LTV could refinance without PMI.
Moreover, the program got extended to acknowledge property holders with PMI on their advance. At last, any unused contract moneylender was ensured not to be held capable of extortion committed on the advance. The program incredibly extended the willingness of moneylenders to take part in the program.
In December 2018, the HARP loan program ended and is not available for any new refinances. However, homeowners having a high LTV ratio can still take benefit from today’s low rates using Fannie Mae’s High-LTV refinance option.
Pros of HARP Loan
1) Homeowners get benefit from the HARP loan
The main reason for the initiation of the HARP loan was to help and give advantage to homeowners. The loan allows homeowners to lower monthly payments to keep the current mortgage or to move the owners to a more stable mortgage by doing a transition from an adjustable-rate to a fixed rate.
2) Mortgages with PMI are qualified for refinance
Later introduced a program of HARP loan helps homeowners with mortgages that include private mortgage insurance to apply for the program. Afterwards, refinancing was allowed for all the occupancy type like rental properties and second home.
3) Can forgo a home appraisal
Homeowners are allowed to forgo a home appraisal if there is an automated valuation model available within the homeowner’s region. As a part of the application process, homeowners upfront must pay to homeowners and there is no guarantee of approval when the cost is paid.
4) No borrower income limit with HARP
There is no borrower limitation of the HARP loan program. Most borrowers can access the benefit of this program. However, it gives more priority to those people who have home underwater but can make a good income in the community or region.
5) Investment properties can qualify for HARP loans
Mostly, mortgage refinances programs exclude investment properties, but when “HARP 2.0” got introduced, it is accessible. Non-owner occupied homes also qualify for assistance, but there are certain limits to those properties. Also, vacation home or second home must be a single-unit property.
6) Flexible borrower qualification environment
Compared to other refinancing programs, the HARP loan program has slightly flexible and liberal borrower qualification requirements. The guideline of the program doesn’t require a minimum credit score. Similarly, they also don’t have a maximum debt to income ratio applied to the borrower.
7) Can have a positive impact on your credit score
HARP loans will not impact your credit score negatively. You won’t get any punishment for making a lower payment than the original mortgage because it is a refinance product and a new credit entry.
Cons of HARP loans
1) The program is not for multiple uses
If you have already refinanced by HARP loan in the past, then you are not eligible for refinancing the mortgages through HARP loan again. You are not allowed to refinance again, even if the rates of HARP loans are good enough and better compared to the rate during the time of refinancing.
You don’t have the option to go back and visit the program again.
2) Two layers of qualification must meet
There is an additional qualification criterion for applicants who are applying for the HARP loan. There are certain conditions issued by the U.S government that the applicants should take care of before applying for the program. The mortgage should be owned or guaranteed by Fannie Mae or Freddie Mac.
3) The borrowers must be current on their mortgage to have qualified for the program
Homeowners should not miss the mortgage payments at any cost.
They should pay the mortgage payments before six months before the starting of the application. They cannot even have one late payment in 12 months before the time of the application.
HARP loan is a lifesaver for most of the homeowners who faced a difficult situation during the global financial crisis and further. It was a positive initiative for underwater homeowners whose homes worth less than the outstanding mortgage balance. By looking at the pros, we can say the HARP loan was very effective.
However, it is not available now and has considerable cons. The program is no longer available for new refinance.