Refinancing your current mortgage loan can save you hundreds of dollars on your monthly mortgage payment. When you refinance, your goal is to switch to a new loan that comes with a significantly lower interest rate. That lower interest rate equals smaller monthly payments.
But what if you don’t have enough equity in your home to qualify for a traditional refinance?
This can be a problem if home values in your area are either stagnant or falling. Homeowners typically need at least 20% equity in their homes to qualify for a refinance. This is fine if home values are increasing. But if your home’s value is falling, building up that 20% equity can be more of a struggle.
That’s where the Home Affordable Refinance Program, better known as HARP, came in. This program, which expired at the end of 2018, was designed to let homeowners refinance even if they had little or no equity. The goal was to give owners the ability to refinance following the housing crash of 2007 and 2008, even if their homes, as many did, fell in value.
HARP no longer exists. But there are alternatives to this program, offered by the government-sponsored enterprises of Freddie Mac and Fannie Mae, that will let you refinance your home loan even if you have no equity or you owe more on your mortgage than what your home is worth.
What Was A HARP Loan?
Equity is important if you want to refinance. It’s the difference between what your home is worth and what you owe on your mortgage. If you owe $200,000 on your mortgage and your home is worth $250,000, you have $50,000 in equity.
Most lenders want you to have at least 20% equity in your home before they’ll approve your application for a traditional refinance.
How do you know if you meet this threshold? It usually requires an appraiser to come to your home and determine its current value. Once you know your home’s value, you can determine your equity percentage.
To do this, first calculate your loan-to-value ratio, also known as your LTV. Divide your current loan balance by your home's current appraised value. Say you owe $150,000 on your loan and an appraiser says your home is worth $210,000. If you divide $150,000 by $210,000, you get about .71, or 71%.
This means you have an equity percentage of 29%, higher than that 20% baseline.
After the housing crash of 2008, home values across the country plummeted. Many owners, then, saw their equity disappear. The federal government launched HARP as a way to give homeowners the chance to refinance even if they had no equity in their homes. They could even refinance if they had negative equity, meaning that they owed more on their loans than what they were worth. All they had to do was tell their lenders that they wanted to refinance through HARP.
HARP Loan Qualifications
Before it expired, HARP required borrowers to meet certain qualifications to participate.
- The mortgage you wanted to refinance had to have been sold to Fannie Mae or Freddie Mac by May 31, 2009.
- Your mortgage’s loan-to-value (LTV) ratio must have been greater than 80%. This makes sense: If your LTV wasn’t that high, you would have qualified for a traditional refinance because you already had 20% equity or more.
- Homeowners were also required to be current on their mortgage payments. You could not qualify for a HARP refinance if you had any payments that were 30 days or more late during the previous 6 months or more than one payment that was 30 days or more late during the last 12 months.
Exploring HARP Replacement Programs
Even though HARP has expired, homeowners with little or no equity can still refinance their homes through two replacement programs, one each by Freddie Mac and Fannie Mae.
Fannie Mae High Loan-To-Value (LTV) Refinance Option (HIRO)
Fannie Mae’s High Loan-To-Value Refinance Option, better known as its HIRO program, works much like HARP: It’s designed to let homeowners refinance even if they don’t have 20% equity in their home. In fact, you can even refinance through this program if you have negative equity, owing more on your mortgage than what your home is worth.
You will have to meet certain requirements for a HIRO refinance, though:
- Your mortgage loan must be owned by Fannie Mae.
- Your lender must have originated this loan on or after Oct.1, 2017.
- You must have no late payments of more than 30 days in the last 6 months.
- Your mortgage must be at least 15 months old.
- For a one-unit home you must have less than 3% equity.
- If you previously refinanced through HARP, you can’t refinance through HIRO.
The Freddie Mac Enhanced Relief Refinance (FMERR)
Freddie Mac also offers a replacement for HARP, the Freddie Mac Enhanced Relief Refinance, better known as the FMERR program. Like HIRO, you can use this program to refinance your mortgage even if you have less than 20% equity in your home.
As with HIRO, you must meet certain requirements to participate in this program.
- Your current loan must be owned by Freddie Mac.
- You must have taken out this loan after Nov. 1, 2018.
- You must be current on your mortgage payments, meaning that you’ve made no payments 30 days or more late in the last six months.
- Your loan must be at least 15 months old.
- For a one-unit home, you must have less than 3% equity.
- If you’ve previously refinanced through HARP, you can’t participate in FMERR.
Advantages Of HARP Replacement Programs
The HIRO and FMERR programs both come with some key benefits:
- You don’t need much, or any, equity to refinance. This differs from traditional refinances in which you need at least 20% equity in your home.
- Mortgage interest rates, as of the writing of this story, remain low. With FMERR and HIRO, you can take advantage of these lower rates, and the lower monthly payments they bring, even without much equity.
- You won’t have to worry about a low appraisal. In a traditional refinance, you need your home to appraise at a value high enough so that you have at least 20% equity. That isn’t a concern with HIRO or FMERR.
Disadvantages Of HARP Replacement Programs
There aren’t many disadvantages to HIRO or FMERR. But that doesn’t mean there aren’t some challenges with these programs.
- To qualify for the program, your mortgage must be owned by Fannie Mae or Freddie Mac. If your loan isn’t owned by either agency, you won’t qualify for these HARP replacements.
- A refinance through HIRO and FMERR isn’t free. As with all refinances, you’ll have to pay the closing costs charged by your lenders. This will vary but can range from 2% to 6% of your total loan amount.
- You can’t qualify for this program if you have already refinance a loan through HARP.
- You can only participate if you’ve had your mortgage loan for at least 15 months.
How To Apply For A Replacement Program
Applying for a FMERR or HIRO refinance isn’t much different than applying for any mortgage refinance. The first step, though, is to make sure that your mortgage is owned by either Freddie Mac or Fannie Mae. You can do this by checking Fannie Mae’s loan look-up tool here and Freddie Mac’s here.
Once you’ve determined that your loan is owned by one of these agencies, you can tell your current lender or any other lender that is licensed to originate mortgages in your area that you’d like to refinance through FMERR or HIRO.
The process will then proceed as if you are closing a traditional refinance. You’ll need to provide paperwork to prove your income, copies of your last two paycheck stubs, last 2 months of bank account statements, last 2 years of tax returns and last two years of W-2 forms.
You will need an appraisal of your home to determine how much equity you have. The goal here, though, isn’t to make sure you have at least 20 percent equity. Instead, it’s to make sure you have less than 3% equity in your home.
If your lender determines that you meet the requirements of HIRO or FMERR, it will then work with you through the refinance process.
The Bottom Line: There Are Still Opportunities To Refinance
The good news for homeowners with little to no equity is that they can still qualify for a refinance as long as their mortgage loans are owned by Freddie Mac or Fannie Mae. Both FMERR and HIRO give these owners the chance to lower their mortgage interest rate and save potentially hundreds on their monthly loan payments.
If you’re considering refinancing your mortgage, check out our online resources to learn more about getting ready to refinance.