Disclaimer: Beginning January 1, 2020, the VA funding fee will be changing to a range of 1.4% – 3.6% based on factors like your down payment or equity amount, your service status and whether this is a first or subsequent use of a VA loan.
As of June 25, 2018, we’ve made some changes to the way our mortgage approvals work. You can read more about our Power Buyer ProcessTM.
Everyone who buys a home goes in with the best of intentions – you plan to make your payment every month, your equity will continue to grow and if you sell it, you’ll make enough to pay off the mortgage, ideally with a little bit of profit.
Hopefully, it works out that way, but for some of us, reality throws a curveball. The value of your house goes down or something comes up and you can’t make your payment for a while. It can be easy to despair, but there is hope. This post will discuss some potential solutions.
Owing More on Your Home Than It’s Worth
If the value of your home has gone down since you bought it, it can be hard to refinance in order to lower your rate or change your term, because most loans require that you have a minimum amount of equity. However, you do have some options.
Home Affordable Refinance Program (HARP)
Helping homeowners since early 2009, HARP was created by the Federal Housing Finance Agency (FHFA) to help homeowners who owed more on their home that it was worth. You may also see this condition referred to as being underwater on your mortgage.
This past August, FHFA extended the HARP loan option through the end of 2018. In order to qualify for HARP, clients must meet the following conditions:
- Fannie Mae or Freddie Mac must own your loan
- You must have originated your loan before May 31, 2009.
- Your loan-to-value (LTV) ratio, which compares the amount you owe on your loan to the appraised value of your home, must be between 80%–200%. For example, if your home is worth $100,000, you can’t owe less than $80,000 or more than $200,000 in order to qualify.
- Your home can’t have more than four units.
- You need to be current on your mortgage payments. This means you can’t have any 30-day late payments in the past six months and only one in the past year.
If you think you meet these requirements, you can use this tool to see if you’re eligible. If your loan doesn’t match up with these requirements and you’re still looking to refinance your conventional Fannie Mae or Freddie Mac loan, it’s worth talking to one of our Home Loan Experts. We may be able to find other options for you.
If you have an FHA loan with little to no equity or even owe more than your home is worth, you may be able to lower your rate or change your term with an FHA Streamline.
If you’re a Quicken Loans client, we can help you with a credit score of as low as 580. For non-Quicken Loans clients, you’ll need a 640 credit score.
Depending on other qualifying factors, you can have a debt-to-income (DTI) ratio of up to 50%.
One of the key benefits of an FHA Streamline is an annual mortgage insurance premium of just 0.55% of your loan amount.
USDA Rate-Term Refinances
If you have a qualified USDA home loan, you can refinance up to the full value of your home, so you’re not required to have any equity.
In order to qualify, you need at least a 640 credit score and the maximum DTI is 50%.
VA Interest Rate Reduction Refinance Loan (IRRRL)
A VA IRRRL (or Earl) allows clients to refinance their loan even if they owe 20% more on their loan than their home is worth, depending on qualifying factors.
The VA doesn’t require a minimum credit score, but lenders set their own policies. At Quicken Loans we require a minimum FICO® Score of 620. Additional qualification requirements are dependent on your situation.
Earls also come with a lower VA funding fee of 0.5% of the loan amount.
If you don’t qualify for any of the above options and need payment relief, you may choose to take a look at a mortgage modification. These can be helpful, but they work differently than a refinance and there are some special issues you need to be aware of. But first, let’s go back to basics.
What Is a Loan Modification and How Does It Work?
A loan modification is intended to help people who are having trouble making their payment get either temporary or permanent relief. There are different ways to help in a modification, but it takes the form of one or a combination of these options.
- Your interest rate is changed so that it’s based on a modification interest rate index from Freddie Mac. It’s designed to be somewhat close to current market rates. If you haven’t been able to refinance, this relief may be enough to help you get back on track.
- If that doesn’t provide you with relief, the term of your loan can be extended to 40 years. Re-amortizing your payments over a longer term means it’ll take longer to pay your loan off, but it’ll be more affordable.
- Finally, if you’re both behind on your payments and owe more than your home is worth, your servicer has the option to set aside some of the excess principal. No interest is charged on that to excess and it’s due when the rest of the loan is paid off.
The modification is reported on your credit, so there’s the potential for it to affect your credit score and the ability to refinance or purchase a new house while under modification. Still, it looks better on your credit than a foreclosure and you get to stay in your home.
Modifications are handled through the servicer of your loan and you should contact them as soon as possible to work with you if you’re having payment trouble.
Who Qualifies for a Modification?
The most important thing to know about a modification is that it’s a big step, so your servicer is going to want to make sure you need it. For that reason, you have to be late with your mortgage payment for a certain amount of time before your servicer will put you in a modification. Contact your servicer about their policies.
When you do get put in your modification, there’s a trial timeframe that may last for between three and four months in order to make sure you can handle the terms of the modification before taking it on for a more long-term basis.
Hopefully, this post has helped you understand your options if you want to refinance with little to no equity or owe more than your home is worth. If you’d like to go over your options, you can get a complete refinance approval online through Rocket Mortgage® by Quicken Loans. If you’d rather get started over the phone, you can give one of our Home Loan Experts a call at (800) 785-4788.
If you’re a Quicken Loans client having trouble with your mortgage payment, we’re here to help. Get in touch with our Servicing team at (800) 863-4332.
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