Government refinancing Programs

(MoneyWatch) Many of the people who contact me after reading my column or listening to my radio show have the same problem: They want to take advantage of low interest rates to refinance their mortgages, but their banks won't do it because the value of their home is now less than what is owed on the loan.

While we've all heard about people who bought homes during the housing boom that they couldn't afford and who are facing foreclosure. But even responsible consumers who bought homes well within their means and can still afford their payments are in trouble these days. Stuck with homes worth far less than they fork out every month on the mortgage, such borrowers are essentially throwing money away.

To help responsible borrowers in this boat, the Obama administration rolled out the Home Affordable Refinance Program in 2009 as part of the Making Home Affordable program. The first program fell short of its goals, so the government made some changes and rolled out HARP 2.0. That seems to have boosted participation in the program. Twenty percent of all U.S. refinancings in May (the latest figures available) were under the HARP program, according to the Federal Housing Finance Agency.

Given the renewed interest in HARP, it's a good opportunity to go over what the program is all about.

What is HARP 2.0? HARP 2.0 is a program that allows homeowners who are "underwater" on their mortgages to refinance. In particular, it's geared toward people who can't find assistance elsewhere. "These are people who don't qualify for a traditional refinance because their homes are underwater, " said Fred Glick, principal of US Loans Mortgage and US Spaces Realty. "This is the only program that allows them to refinance their loans."

How is HARP 2.0 different than HARP 1.0? There are two key changes between the first and second versions of the program. First, unlike its predecessor, HARP 2.0 allows borrowers with mortgage insurance to qualify for a refi. This opens up the program to an entirely new - and much larger - pool of borrowers.

Perhaps most important, the new originator is relieved of responsibility for anything that happened on the first loan. "If there was massive fraud on the underwriting of the first loan, the new lender is not responsible, " Glick explained. "They're only responsible for any new fraud that occurs. This means lenders are more willing to help."

Who is eligible for a refi under HARP 2.0? According to MakingHomeAffordable.gov, in order to qualify for the program your mortgage must:

• Be owned or guaranteed by Freddie Mac or Fannie Mae
• Have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009
• Not have been previously refinanced under HARP, unless it is a Fannie Mae loan that was refinanced under HARP between March and May of 2009

The current loan-to-value ratio on a mortgage also must be greater than 80 percent to be eligible for refinancing, and you must be current on payments for the last 12 months. On its site, MakingHomeAffordable points out that these criteria are for guidance only and that interested borrowers should call their mortgage servicers to find out if they qualify.

Glick said that borrowers interested in using HARP 2.0 need to have a credit score of at least 620, noting that these are "full doc" loans. In other words, homeowners must be able to prove income and assets in order to qualify for the reduced payment.

Find a mortgage broker who knows the ins and outs of your particular loan when trying to refinance under HARP 2.0.

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How do I find out if my lender is participating? Any mortgage originator can issue a HARP loan, so it's not necessary for borrowers to go back to their original lender. That said, just because any lender can participate doesn't mean all of them do. Call around to find lenders who are offering refinancing under HARP.

Who should I contact? Since you're not required to go to your original lender to obtain a refi under HARP 2.0, you have the option of working with any broker or bank lender. Shop around so you understand what kinds of programs lenderes are offering. If you want to make it easier, Glick suggests finding a mortgage broker who is familiar with your particular situation. "Each lender has its own quirks, " he said. "In particular, Freddie Mac has a lot of quirks in its system right now."

Ask a trusted friend, family member, or real estate professional if they have any brokers they can recommend. Also make sure to interview more than one to find the right fit. Glick said you'll know you've found a good broker when the person starts asking lots of questions about your loan. "There are a million little things they have to know, the little twists and turns, " he added. So if a broker doesn't know enough to understand the questions she needs to ask, it's time to move on.

Understand that because you're going into a HARP refinance, you won't get the kind of interest rates you're hearing about, like 30-year fixed-rate loans at 3.25 percent. HARP loan rates this month are generally over 4 percent.