What you need to know....
The new HARP 2 is set up to provide relief to homeowners that are upside down. One of the requirements of the program is that a borrower who is refinancing with through HARP may only refinance their first mortgage and they cannot “roll in” a 2nd mortgage. What does a homeowner do if they have a 2nd mortgage?
Short answer – they need to get moving and apply for HARP now! Second mortgages must be re-subordinated. Re-subordinating a 2nd lien can take time and the results of a re-subordination request can impact the approval on the 1st lien being refinanced through HARP. At this point, you may be asking “what is a re-subordination?” Great question!
Re-Subordination defined: A re-subordination is a process by which an existing 2nd loan/ lien holder agrees to stay in 2nd lien position behind a new refinanced 1st lien/loan. Lets take a look at an example:
Frank bought a home and financed it using two mortgages – a 1st and 2nd lien. Frank’s 1st lien was equal to 80% of the purchase price and the 2nd lien was equal to 10% of the purchase price (he paid the remaining 10% as a down payment). In this situation the 10% 2nd lien is the subordinate or 2nd lien behind Frank’s 80% primary 1st lien.
If Frank wanted to refinance his 1st lien/loan using the HARP program he would need to re-subordinate his existing 2nd lien/loan. Based on the original loan terms Frank signed during his purchase, his 2nd lien/loan has the right to move into 1st lien position if/when Frank’s 80% 1st lien is ever paid off (which it would be during a refinance). The challenge is that Frank’s new HARP refinanced 1st loan must be in 1st lien position in order to close. In order to accomplish this, we must ask Frank’s old/existing 2nd lien holder to agree to give up their right to move into 1st line position and go into/stay in 2nd lien position behind Frank’s newly refinanced HARP loan.
Why does lien position matter? It’s simple. The lien holder in 1st lien position gets paid first if and when a homeowner defaults/forecloses on their loan. Based on the fact the 2nd lien holders were already in 2nd position before a refinance they typically do not have an issue re-subordinating.
Why is re-subordination important – especially with HARP?
There are a few reasons why processing a HARP application as soon as possible is critical especially when there is a 2nd lien involved:
1. The re-subordination approval/agreement from the 2nd lien holder must be received BEFORE a borrower can close on a HARP refinance when there is a 2nd
loan on the property being refinanced.
2. We (the new lender) need to know what the terms of the re-subordination agreement are as early as possible in order to ensure the newly refinanced lien meets those requirements.
example: Recently I closed a HARP refinance for a client who also had a 2nd lien on their property. The 2nd lien holder agreed to re-subordinate however
they would only do so if we kept the new 1st lien/loan amount at or below a very specific and down to the penny dollar amount.
3. Re-subordination approvals/agreements can take anywhere from 2 to 6 weeks to receive depending on who the borrower’s 2nd lender is.
As long as we receive an acceptable re-subordination approval/agreement than it is business as usual with refinancing the existing 1st lien. After our HARP refinance is complete, the borrower would have a brand new lower rate 1st lien. Their second loan would stay exactly as it was before the refinance.
If you are interested in finding more out about how HARP 2 can help you please give me a call. Also, please click HERE for more about general HARP 2 guidelines and to find out if you are eligible.
Jeremy House
Jeremy’s Mortgage Website
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