Back in 2009, as the mortgage crisis was slowly ending, many homeowners found themselves in a terrible position; their home was worth much less than their current mortgage balance. To persuade people to stay in their homes and avoid a wave of foreclosures across the country, Fannie Mae and Freddie Mac introduced the HARP plan. That plan ended on December 31, 2018, and was replaced with a new High loan-to-value (LTV) refinance options.
Different Names but Similar Programs
Fannie Mae will offer a program known as High LTV Refinance Option while Freddie Mac will have a loan named Enhanced Relief Refinance Program, aka ERRP. Here are some of the highlights of these two loans.
- Restricted – The new high LTV refinance will only be available as a refinance option and only to existing loans that were closed on or past the day October 1, 2017.
- The Fannie Mae High LTV Refinance loan is only available to people who currently have a Fannie Mae loan.
- The Freddie Mac ERRP is only available to people that currently have a Freddie Mac Loan.
- Homeowners that currently have a HARP loan MAY NOT use either of the two new loans offered by Freddie Mac and Fannie Mae
This is slightly similar to the VA refinance which is only available to people currently paying on a VA home loan.
Although the new high LTV refinance loans are only open to people who already have either a Freddie Mac or Fannie Mae conventional mortgage, there are a few benefits of the new program.
- Reduced documentation – People that have qualified for one mortgage are familiar with the request from the lender for all types of documents such as pay stubs, tax returns, retirement account statements, and other items. The new program does not always require borrowers to prove their current income level or existence of any assets.
- The programs do not enforce a set minimum score on credit reports
- The maximum debt-to-income ratio is not used
- Lenders may use automated underwriting through online systems or they can choose to use manual underwriting as well. This gives borrowers an opportunity to shop around and compare interest rates from different lenders.
The goal of these features is designed to make it faster for homeowners to get approval and close the loan without a lot of red tape.
In order to determine which homeowners are eligible for the new high LTV loans, they first must be paying on an existing Fannie Mae or Freddie Mac mortgage. Next, the new refinance loan must satisfy one of the following criteria:
- The new loan results in a lower principal/interest monthly payment compared to the existing loan
- The new loan has a shorter payback term than the existing loan.
- The homeowner is moving from an adjustable mortgage to a fixed-rate loan.
- The homeowner is able to lower their interest rate on their loan.
If the new loan meets one of those requirements, then the borrower must also meet all of the following criteria:
- A borrower may not have any mortgage payment in the past 6 calendar months that were more than 30 days late
- The borrower may have only one payment within the most recent year that is over 30 days late.
Any borrower that has at least one payment at least 60+ days late may not apply for the new loan.
Fannie Mae Specific Rules
Fannie Mae has some very specific rules about who can apply and how the loan is structured. Most notably, the borrower must have a current loan balance above 97% of the property’s current worth. This applies only to a single-family home. This program is available for investment homes, a vacation home, or a multi-unit property with varying loan-to-value guidelines, outlined below.
- Investment home, whether it is one unit or all the way up to a 4-unit home: The Loan To value must be higher than 75%
- Duplex, the Loan to value must be above 85%
- Vacation Home, the loan to value must be above 90%
- For a multi-unit property, up to a 4-unit property that is the borrower’s main residence, the loan to value must be higher than 75%
If an applicant has a loan to value below the above-named percentages, they will need to apply for a standard refinance loan.
Freddie Mac Specific Rules
Freddie Mac has a different approach to the ratios. Their guidelines simply state that the new mortgage must have a loan to value that is higher than Freddie Mac’s loan to value limits for a no cash-out refinance loan.
Here is the maximum loan to value ratios for current Freddie Mac loans
- Single unit investment home 90%
- Investment home with between 2 and 4 units 75%
- Primary home, single unit, 95%
- A primary home that is a duplex, 85%
- A primary home that has 3 or 4 units, 80%
- Vacation home, 90%
Like the Fannie Mae loan, if a borrower finds that their new loan to value is below these ratios, then they would need to apply for a standard Freddie Mac refinance loan.
It is possible to get approved for either of these loans without the need for an appraisal. However, this is decided on a case by case basis. It is better to assume that a new appraisal will be needed, and then be pleasantly surprised if the lender tells you that your approval does not require a new review of the home.
If the current conventional loan has private mortgage insurance, then the new loan will require that the mortgage insurance be continued. However, if any borrower is currently paying on a Freddie Mac or Fannie Mae loan without private mortgage insurance, there will NOT be a PMI requirement on the new loan.
Summing Up The High LTV Refinance
For any homeowner currently paying on a conventional loan, and they did not take advantage of the HARP mortgage, this new offering could be a great way to refinance to an incredibly low-interest rate and get the refinance completed with much less paperwork and time.