Fannie Mae cuts ‘ability to pay’ requirement
Though all major lenders previously indicated they would begin offering the updated Home Affordable Refinance Program for upside-down homeowners starting in December 2011, none have yet begun processing applications for borrowers who are more than 125 percent loan to value.
Banks are processing HARP applications for borrowers whose loan balances do not exceed 125 percent of their home value. But the vast majority of Southern California borrowers have mortgages that far surpass the 125 percent loan-to-value limit, which was lifted when the HARP program was updated in November.
Fannie Mae recently announced that it had removed the “reasonable ability to repay” clause from its borrower requirements to qualify for a HARP refi, as long as the new payment did not increase by more than 20 percent.
“(Banks are) no longer required to determine the borrower has a reasonable ability to repay the mortgage based on a review of the information provided on the new loan application,” according to the latest update from Fannie Mae.
Previous HARP guidelines required banks and servicers to collect and verify information from a borrower to ensure they could repay the mortgage.
Fannie Mae’s clarified rules now allow a bank to make the loan without collecting income and expense information. However, if the homeowner’s mortgage payment increases by more than 20 percent, the borrower must provide documentation to verify their debt payments do not exceed 45 percent of their gross income, according to Fannie Mae.
Fannie Mae changed their requirements to help prod banks to make more loans in an effort to stem the tide of strategic defaults. Along with lifting the loan-to-value limits, the updated HARP guidelines also eliminated the requirement that lenders guarantee that borrowers perform on these loans.
Still, the “ability to pay” requirements contained unclear language that continued to vex lenders, perhaps even contributing to the delay in major banks’ launching of the program.
“In our conversation with lenders, this has been often highlighted as one of the significant hurdles to HARP refinancing,” analysts from investment banking firm Barclays told Default Servicing News this month. “Lenders argue that lack of clarity on what ‘reasonable ability’ precisely means could expose lenders to liability in the event that the loan defaults.”
Freddie Mac has not removed the “ability to pay” requirements from its HARP guidelines.
FANNIE OR FREDDIE: The program is only eligible for home loans that have been owned or backed by Freddie or Fannie since at least May 31, 2009. That doesn’t mean you get a mortgage statement from either of those entities. Even though you may write your monthly check to Bank of America or Wells Fargo, your loan could be owned or guaranteed by one of these two “government sponsored entities.”
So how do you know? To find out if your loan qualifies, check online at:
Freddie Mac: https://ww3.freddiemac.com/corporate/
Fannie Mae: http://www.fanniemae.com/loanlookup/
Or call our office at 951-778-9700 and we’ll help you get that answer.
UNDERWATER LOANS: For 15- to 30-year fixed loans, there is no cap on the refinance loan amount, regardless of whether your home is upside-down.
LTV is limited to 105 percent for fixed-rate loans with terms of 31 to 40 years and for adjustable-rate mortgages with initial fixed periods of five or more years and terms up to 40 years.
HARP is limited to only those homeowners with less than 20 percent equity. Homes with more than 20 percent equity can more easily qualify for existing conventional refinance programs and thus do not need this program.
LATE PAYMENTS? A borrower must be current on their loan payments. You cannot have any payments that were 30 or more days late in the past six months, and you are allowed only one payment of 30 or more days late in the past 12 months, according to program guidelines.
CAN YOU AFFORD PAYMENT? In some cases, the homeowner must meet underwriting guidelines, which require an income sufficient to afford the new house payment along with property taxes, insurance and all other expenses.
Your lender will detail the income and expense ratios based on your specific situation.
BANKRUPTCY or FORECLOSURE? The borrower no longer must meet the standard waiting period following a bankruptcy or foreclosure, which is critical in today’s housing environment.
The program ends Dec. 31, 2013.
Even though a homeowner may qualify for a HARP refinance, the program is voluntary: Banks remains free to reject a HARP refinance even if a homeowner meets all requirements.
If a bank rejects you, persistence is key – find another bank!
Homeowners who don’t qualify for HARP have several other options to consider if they are struggling with their current payments.
Some homeowners have mortgages with payments expected to increase next year. Others are dealing with reduced income or must relocate for work. In these cases, if HARP is not an option, you have alternatives.
Call us today at 951-778-9700 for details.