Q: I am trying to refinance with HARP, but because I did a HAMP loan modification my servicer says I cannot refinance with HARP. Is that correct?
A: We wish the answer to your question was simple and straightforward, but we found some conflicting information from Fannie Mae.
Let’s start by discussing some basics.
A modification changes the terms of your loan
If you entered into a HAMP agreement, you would have had to document a hardship that prevented you from making the agreed-upon payments for your original mortgage. To modify your loan, the servicer would have changed the terms of your original loan to get your monthly mortgage payment down to not more than 31 percent of your monthly gross income.
These changes may have come in the form of:
- Lengthening the term of your loan up to a 40-year term
- Lowering your interest rate in increments (potentially down to 2 percent)
- Perhaps even principal forgiveness to make your loan more affordable
HARP after HAMP is possible, but is it worth it?
It's not theoretically impossible to refinance under HARP after a HAMP modification. However, it may depend upon the terms of the modification, such as whether or not the loan modification included principal forgiveness or deferment, and other factors.
That said, you should also be aware that it is unlikely that a refinance under HARP will provide you the same payment relief as your modification did, as refinances are written at today's current mortgage rates, which may be up to several percentage points higher than your modified loan’s interest rate (again, which could be as low as 2 percent), so this may nullify the need for a HARP refinance.
Fannie says they don’t back modified loans
To learn more about whether a homeowner can refinance through HARP after their loan has been modified through HAMP, we reviewed Fannie Mae’s “Selling Guide.” Remember, any HAMP or HARP loan must be backed by Fannie Mae or Freddie Mac. According to the Selling Guide, a modified loan is “not eligible for delivery to Fannie Mae”:
Part B, Origination Through Closing
Subpart 2, Eligibility
Chapter 1, Mortgage Eligibility, Other Loan Attributes and Related Policies, Page 211, May 15, 2012
"A modified mortgage is a loan that was legally modified after loan closing in a way that changed any of the loan terms or attributes reflected in the original note. In general, mortgage loans with material modifications, such as changes to the original loan amount, interest rate, final maturity, or product structure, are not eligible for delivery to Fannie Mae."
HAMP borrowers can also refinance if there is a clear benefit
However, we also uncovered this language which specifies when a HAMP borrower can also be approved for a HARP refinance (https://www.efanniemae.com/sf/guides/ssg/sg/pdf/sel051512.pdf):
Part B, Origination Through Closing
Subpart 5, Unique Eligibility and Underwriting Considerations
Chapter 5, Community Seconds, Community Land Trusts, DU Refi Plus™ and Refi Plus™, and Loans with Resale Restrictions, DU Refi Plus and Refi Plus Mortgage Loans, Page 787
"A borrower who has applied for or received a loan modification is eligible to refinance under DU Refi Plus" (this is Fannie's name for the HARP program).
"The borrower benefit provision (described above) must be met. The terms of the modified loan (trial or permanent) must be used for this comparison. If the borrower was previously in a trial period plan, but denied a permanent modification, the current terms of the loan must be used for this purpose."
The “borrower benefit” (mentioned above) means that the new loan must provide:
- A reduced monthly mortgage principal and interest payment
- A more stable mortgage product
- A reduction in the interest rate
- A reduction in the amortization term
Contact your servicer
So even though a HAMP-modified loan may be technically eligible for a HARP refinance, your specific modification may mean that there is no borrower benefit that meets the required definition, so your specific loan is not eligible for a HARP refinance.
To learn more, please read “HAMP versus HARP: Which is right for you?”
More help from HSH.com
Advantages of FHA mortgages in 2018Although the cost of an FHA-backed mortgage isn't likely to get any cheaper in 2018, access to credit for homebuyers with less-than-stellar credit should improve.