HARP, or the Home Affordable Refinance Program, was created to help homeowners that are current on their mortgage, though have little or no equity in their home. To qualify for this type for this type of refinancing option, they usually must owe as much, if not more, than what their home is currently worth.
HARP loans were first created in March 2009 by the U.S. Federal Housing Finance Agency.
Not everyone will qualify for a HARP loan, which is why these pros and cons are so important to evaluate before making a final decision on refinancing a mortgage.
List of the Pros of HARP Loans
1. Homeowners are guaranteed to benefit from a HARP loan.
One of the qualifying criteria for a HARP loan is that it must help the homeowner in some way. The loan must either allow for lower monthly payments to keep the mortgage current or move the homeowner to a mortgage that is more stable, such as a transition from an adjustable rate to a fixed rate.
2. Mortgages with PMI may qualify for a refinance.
A redesign of HARP, often called “HARP 2.0,” introduced the ability of homeowners with mortgages that include private mortgage insurance to apply for the program. It also allowed refinancing on all occupancy types, including rental properties and second homes.
3. Homeowners can forgo a home appraisal.
If there is an automated valuation model that is available within a homeowner’s region, then the HARP application process may allow some applicants to forgo a home appraisal. Most appraisals must be paid by the homeowner upfront, as part of the application process, so there is no guarantee of approval when this cost is paid. Home appraisals in some communities may cost $1,000 or more. This advantage saves time and money for the potential borrower.
4. Investment properties qualify for a HARP loan.
Most mortgage refinance assistance programs exclude investment properties. Since HARP 2.0 was introduced, non-owner-occupied homes do qualify for assistance. There are certain limits to the non-owner-occupied properties, such as a limit of four units. Second homes or a vacation home must be a single-unit property.
5. There is no borrower income limit with HARP.
Although there are maximum loan caps in place with HARP, there are no borrower income limits that are part of the application process. Eligibility is not restricted to certain income demographics. That means more borrowers can access the benefits of this program, especially if their home happens to be under water, but they are making a good income for their region or community.
6. The borrower qualification requirements are somewhat flexible.
HARP does have strict loan requirements which must be met. Those requirements are not as strict when it comes to borrower qualification when compared to other refinancing programs. The program guidelines do not require a minimum credit score, nor do they have a maximum debt-to-income ratio that must be applied to the borrower. That makes it easier for more borrowers to qualify, despite credit challenges, as long as they have stayed current on their mortgage.
7. Many borrowers have excellent to better terms.
For borrowers that have an excellent history, the credit terms available under HARP are comparable to what the rates of a new mortgage would be. Some homeowners were facing 6-9% mortgages on their homes from previous refinancing efforts in the years before this program was introduced. Depending upon your current interest rate, there is a possibility that it could be halved. There are fewer service and origination fees associated with HARP as well, which saves homeowners further when compared to other refinancing programs.
8. It can have a positive impact on your credit score.
Credit ratings are rarely impacted negatively when applying for a HARP loan. The only real concern is adding a “hard” credit pull to the report, which may reduce a credit score by a handful of points if there have already been several reports pulled by lenders in the past 24 months. Borrowers are not punished for making a lower payment than their original mortgage because it is a refinanced product. It’s a new credit entry.
9. Some borrowers may have access to additional cash.
HARP loans do permit homeowners to borrow a larger amount than their existing mortgage balance in certain situations. Homeowners that have some limited equity in their home may also receive a payment to compensate for what was achieved under the previous mortgage struggle. That extra cash can then be used for emergencies, retirement, or a much-needed vacation.
10. HARP loans can be structured to automatically pay certain responsibilities.
Like with other mortgage products, your HARP loan can be structured to collect a pro-rated monthly amount for your property taxes, homeowner’s insurance, or homeowner’s association dues. What can be structured into your mortgage payment will often be determined by the underwriter who receives the application in the first place. Some loans may require these elements to be present, while others may specifically exclude them. Be sure to ask what is included within the payment of the loan to ensure you know what you’ll need to pay directly later on.
List of the Cons of HARP Loans
1. There are two layers of qualification that must be met.
Specific mortgage servicers are permitted to place additional qualification criteria onto applicants looking for a HARP loan. There are specific conditions that must be met by homeowners to qualify under the standards issued by the U.S. Government as well. That includes having a mortgage owned or guaranteed by Fannie Mae or Freddie Mac. The mortgage must have been acquired before May 31, 2009, and the LTV ratio must be greater than 80%.
2. The program cannot be used multiple times.
Homeowners that have refinanced their mortgage under HARP in the past are no longer eligible for another HARP product. Even if the rates of a HARP loan are better now than they were during the time the mortgage was refinanced, homeowners have no option to go back and visit the program. That forces homeowners who may get into future trouble toward the private mortgage market, where there may be no other refinancing products available to them.
3. All borrowers must be current on their mortgage to qualify.
Under the guidelines issued by HARP 2.0, any applicant must be current on their mortgage. They cannot have missed a mortgage payment or paid late within the six months prior to starting their application. There is also a stipulation that they cannot have had more than one late payment in the 12 months prior to the time of their application. That means the borrowers who may need the help the most are ineligible for the program because of late payments or a delinquent mortgage.
4. There are loan limits associated with HARP.
The size of the loan that can be obtained through HARP is limited. The program uses the conforming loan limit for the program, which can have a maximum range of about $450,000 to about $675,000 in the 48 continental states. In Alaska and Hawaii, the maximum limit is just above $1 million. These limits apply to a single property unit. Living in the more expensive areas of the U.S. can make it difficult for some homeowners to seek the refinancing products they need to keep their finances afloat.
5. It will be replaced in 2019.
HARP is currently scheduled to expire on December 31, 2018. That means anyone thinking about applying through this program for mortgage assistance must get started on their application right away. Another program is set to replace HARP in 2019 for borrowers who have a high LTV ratio, though there is no guarantee that the program will be implemented as intended. If a homeowner knows they are eligible for HARP, they should take action as soon as possible.
6. Some lenders may require income standards to qualify for a loan.
HARP may not have guidelines for a maximum debt-to-income ratio or a minimum credit score, but some lenders may have internal underwriting guidelines which require them. When applying for a HARP loan, some borrowers may be asked for income verification paperwork or require a credit report to be pulled. Not meeting the internal underwriting guidelines, even if the governmental guidelines are met, may still disqualify some borrowers from obtaining a refinanced mortgage.
7. Borrowers cannot shop around for terms.
Applying for HARP, especially with PMI, means a borrower may be required to refinance their loan with their existing servicer. That means there would be limited opportunities to find better terms. If the servicer does not work with HARP, it could be extremely difficult to get into the program as well, even if the borrower fully qualifies.
The pros and cons of a HARP loan are intended to help homeowners keep their finances afloat while they struggle with a home that is potentially under water. The strict requirements of the program exclude many borrowers who would benefit from it, though that also means borrowers who qualify are very likely to receive a better mortgage, lower monthly payments, or both.