Understanding Government Refinance Programs
When it comes to refinancing a mortgage, there are myriad reasons consumers choose to take the plunge. Many homeowners refinance to secure a lower interest rate or a lower monthly mortgage payment that improves their cash flow. Others refinance out of need, due to struggles over affordability or falling property values.
If you’re happy with the home you have, but less than satisfied with your mortgage, it’s possible refinancing could leave you better off — still, you should compare refinancing options thoroughly before you decide either way. If you opt to refinance your home, you’re essentially swapping your existing mortgage with a new one — that new loan may come from a traditional lender, or you could look at refinance programs offered by the federal government.
- What are government refinance programs?
- Advantages of government-backed refinance programs
- Disadvantages of government-backed refinance programs
- Final thoughts
What are government refinance programs?
Government refinance programs offer special assistance or benefits to homeowners who qualify. These requirements are based on details such as the type of loan they have, their military status, or even the equity a person has in their home. Since each government refinance program works differently, you’ll want to brush up on each of the main programs, how they work, and eligibility requirements.
Some programs you may have heard of, such as the Home Affordable Modification Program (HAMP), Second Lien Modification Program (2MP) and Home Affordable Foreclosure Alternatives (HAFA) program, are no longer available — these programs stopped accepting new applicants on Dec. 30, 2016.
The Home Affordable Refinance Program (HARP)
One popular government refinance program to consider is the Home Affordable Refinance Program, also known as HARP. This program was created by the Federal Housing Finance Agency with the goal of helping homeowners with little equity refinance into new home loans with better rates or terms.
Generally speaking, HARP was created to help underwater homeowners who couldn’t qualify to refinance their mortgage through traditional means after the housing crisis of 2008. While the program was created in 2009 and initially aimed at borrowers who had less than 20% equity in their property, changes made in 2011 removed the loan-to-value (LTV) ceiling for these loans, previously set at 125%. Further changes, including removing property appraisal requirements in some cases, have also helped more homeowners become eligible.
Consumers eligible for a HARP refinance may choose to move forward for a few different reasons. For example, a new loan could help them:
- Qualify for a lower interest rate that could help lower their monthly mortgage payment
- Refinance from an adjustable rate mortgage into a new loan with a fixed rate
- Build equity faster with a new loan that features a shorter term
The HARP program offers additional benefits that make exploring this option a smart move. For example, there are no underwater limits, meaning you can refinance regardless of how underwater you are on your mortgage. There are also no appraisals or underwriting, which means a speedier process and perhaps even lower closing costs. HARP also notes that there is less paperwork involved now than in the past, and that “certain risk-based fees” for borrowers switching to shorter term loans are now less than they were previously.
However, if you want to refinance with HARP, you’ll need to move fast — the end date to qualify for a HARP refinance is Dec. 31, 2018.
Who is eligible?
To be eligible for a HARP refinance, you must:
- Have a mortgage owned by Fannie Mae or Freddie Mac
- Have not made any 30+ day late payments in the last six months and have no more than one late payment in the last year
- Own a property that is your primary residence, a 1-unit second home, or an investment property with 1 to 4 units
- Have a home loan that was originated before May 31, 2009
- Have a current loan-to-value ratio of 80% or more, meaning you owe more than 80% of your home’s value on your loan balance
FHA streamline refinancing
If you already have an existing mortgage insured by the Federal Housing Administration, you can expedite your new home loan with FHA streamline refinancing. This type of refinance requires minimal or no credit documentation and limited underwriting, which leads to a process with less documentation and paperwork overall.
According to the U.S. Department of Housing and Urban Development, lenders may offer these loans in several different forms. You may qualify for a FHA streamline refinance with no closing costs provided you are willing to pay a higher interest rate, for example.
Who is eligible?
To qualify for an FHA streamline refinance, you must already have an FHA mortgage. Other requirements include:
- The FHA loan you want to refinance must be current — in other words, you cannot be behind on your monthly mortgage payments
- There must be a benefit to the borrower, such as a lower interest rate or lower monthly payment
- You cannot take out more than $500 cash on the mortgage during the refinance process
Veterans Administration Interest Rate Reduction Refinance Loan (IRRRL)
The U.S. Department of Veterans Affairs offers home loans specifically for active military, veterans, and eligible surviving spouses. This includes the Interest Rate Reduction Refinance Loan, also known as IRRRL.
This loan was intended to help expedite the refinance process for veterans who want to secure a new loan with a lower interest rate, and possibly a lower monthly payment. IRRRL loans can do this because they don’t require an appraisal or credit underwriting, meaning there is a lot less paperwork and documentation required. Interest Rate Reduction Refinance Loans may even be done with no out-of-pocket costs to the borrower, provided they have included the closing costs in the new home loan or a higher interest rate is being charged instead.
The VA doesn’t impose limits on borrowing for a home loan, but many lenders may require a down payment on the amount above the loan limits set by the Federal Housing Finance Agency. You may look up your county’s loan limits here. These loans also require a funding fee that is charged as a percentage of the loan. This fee helps borrowers avoid paying monthly mortgage insurance and down payments. The VA suggests that borrowers should compare several loan offers from mortgage lenders offering IRRRLs since terms can vary and some may offer lower rates than others.
Who is eligible?
An IRRRL can only be used to refinance a property with an existing VA home loan. Other eligibility requirements include:
- No other VA loan can be paid off from the proceeds of an IRRRL, including a second mortgage
- You do not have to prove occupancy for the property you intend to refinance; you are only required to state that you have lived there in the past
- You must be a servicemember, veteran, or eligible surviving spouse to qualify for a VA loan
Advantages of government-backed refinance programs
While government-backed refinance programs aren’t ideal for everyone, there are some notable advantages that come with going this route. According to Sean Thomas, a Los Angeles-based mortgage representative with Ascent Lending and president of MHC Properties, the type of benefits you can count on depend on the government-backed refinance program you choose.
For example, the HARP program can be extremely helpful since the amount of negative equity your home has doesn’t preclude you from qualifying. Thomas notes this program has helped many of his clients secure a lower interest rate on their home loan, and some have even gotten rid of PMI, or private mortgage insurance.
While the current program is set to sunset later this year, Thomas notes that government mortgage programs are frequently extended if the demand is there.
FHA streamline refinancing is another great option for borrowers who already have a FHA loan, said Thomas — “it provides a way for those with a current FHA loan to refinance the loan without having to provide an appraisal or be income qualified.”
This can make qualifying for a refinance much simpler and a lot less stressful. For example, if a borrower had a full-time job when they qualified for their initial mortgage but they are currently self-employed and their income is harder to prove, they may still be able to refinance with FHA streamline refinancing.
Thomas said that the benefits for VA Interest Rate Reduction Refinance Loans (IRRRL) are similar to FHA streamline refinancing. While IRRRLs are only available for qualified veterans, servicemembers, and eligible spouses, these loans offer a path to refinancing into a new loan with a lower rate or better loan terms without cumbersome steps like an appraisal or credit qualifying.
Disadvantages of government-backed refinance programs
One of the biggest drawbacks to government-backed refinance programs is that, as the housing market has continued recovering from the mortgage crisis of 2007 and 2008, some programs, including the Second Lien Modification Program (2MP) and Home Affordable Foreclosure Alternatives (HAFA), have been phased out. Even the HARP program will end later this year unless it is extended.
Another potential drawback has to do with rising mortgage rates overall. While FHA streamline refinancing and IRRRLs can help consumers save money, many homeowners may no longer be able to get a net tangible benefit unless their current interest rate is fairly high, said Thomas.
This is especially true for IRRRLs since they come with an upfront funding fee that is higher with subsequent VA loans. If a homeowner wants to use an IRRRL to transition from a 30-year VA mortgage to a 15-year VA loan, for example, the funding fee could wipe out any savings they receive with a lower interest rate.
The VA even notes this on their website: “While this can save you money in interest over the life of the loan, you may see a very large increase in your monthly payment if the reduction in the interest rate is not at least one percent (two percent is better). Beware: It could be a bigger increase than you can afford.”
Government-backed refinance programs are also not available to all consumers. You must have an existing FHA loan to qualify for FHA streamline refinancing, for example, just like you have to have a VA loan to qualify for an IRRRL. The HARP program is only available to homeowners with less than 20% equity and mostly on-time payments as well, but as noted, it is set to end later this year.
If you are considering refinancing your home, there are plenty of options to consider. You could inquire about government refinance programs if you believe you could qualify, but you could also check with a lender about refinancing via a conventional home loan if you suspect you may not.
Before you refinance your home, however, make sure you’re getting something out of the deal. If you won’t end up saving money on interest, securing a more attractive mortgage payment, or improving your finances in some other way, the hassle may not be worth it.