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Avoiding Foreclosure When Your Home is Financially Under Water

Updated on June 16, 2013


The real estate implosion which occurred in 2008 has had long lasting effects on many homeowners. Real estate values have started to recover in some parts of the U.S., but in other areas that recovery could take a decade or more, if it happens as all. There are more homeowners now who are “under water” with their mortgages than their were during the Great Depression. The term “under water” is a real estate term which indicates that someone owes more on their mortgage than their home is worth.

Even worse, in spite of the fact that interest rates sunk to historic low levels for several years, many of these under water homeowners still have subprime mortgage loans with expiring adjustable interest rates. Still others have creative types of mortgages that have added huge amounts to the principle balance of their loans. Many homeowners used these creative loan products because they were expecting home values to continue to rise as they had done over the past 20 years. They needed some time to repair their credit or to increase their income.

Unfortunately, now that their situation has improved in those respects, these homeowners are finding their homes no longer qualify for refinancing because the values have dropped. They can often no longer afford to make their payments and they are facing foreclosure.

Details Of HARP

In response to these problems, the government instituted the Home Affordable Refinance Program. As usually happens with programs such as this one, the politicians created a program which originally benefited no one! Almost no homeowners at the time ever fit within the guidelines of the program and therefore very few loans were ever done under the original HARP program. Because of this, the program was completely modified in May of 2012 so that more borrowers can actually qualify and get help. This program now represents over 20% of all mortgage refinances being closed and the program is about to be extended for 2 more years.

When the Home Affordable Refinance Program was first put into effect, the guidelines required that the new loan amount could not exceed 125 percent of the current appraised value. Under then current market conditions this ruled out most of the borrowers the program was intended to help. Even as home values rose, most borrowers would still not qualify for that original program.

Under the revised guidelines, for fixed rate mortgages the 125% loan to value requirement was removed. In fact, the loan to value must be above 80%. In other words, you need to owe more than 80% on the value of your home. In addition, many of the extra fees originally associated with the Home Affordable Refinance Program were removed under the new guidelines. This is not a huge problem. If you have decent credit and you owe less than 80% of the value of your home, then you do not need a special program to qualify for a refinance.

In order to qualify for a mortgage refinance under the Home Affordable Refinance program, your original mortgage must be owned or guaranteed by Freddie Mac (FHLMC) or Fannie Mae (FNMA). Finding out whether you fit this guideline is not exactly straightforward. For example, you are probably making your payments currently to a lender such as Bank of America, Wells Fargo, or Chase Bank. However, those banks are probably only being paid to service your loan. That bank may no longer actually it. They are being paid by Freddie Mac or Fannie Mae to collect the payments. However, you can find out whether your loan is owned by Freddie Mac by calling 1-800-FREDDIE (800-373-3343). You can check to see if your loan is owned by Fannie Mae by calling 1-800-7FANNIE (800-732-6643).

Once you have passed the first barrier, the next requirement is that your loan must have been transferred to Freddie Mac or Fannie Mae on or before May 31, 2009. If you closed on your current mortgage after that date you are not eligible for the program. Most likely you already have a really low interest rate and you bought after property values fell if you closed after that time so the program would not lower your payments anyway.

You have probably heard, at one point or another, the advice that you need to be behind on your payments in order to qualify for a special refinance program. Although there are some loan modification programs available to help these people, HARP is not one of them. Those programs are incredibly difficult to qualify for. In order to qualify for Home Affordable Refinance, you need to be current on your mortgage payments and you cannot have been late with a payment at any time within the past six months or late more than once during the last year.

If you are one of the few people who qualified to refinance under the original HARP then you are not eligible for the new program. If you tried to qualify under the original program and were turned down, you definitely should try to qualify under the new guidelines.

Many people have made the decision in today’s tough economic times to just walk away from their mortgages and hand the problem over to the bank. The Home Affordable Refinance Program is one way for borrowers to avoid going down with the ship just because they are under water on their home financing.


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