Pros and Cons of HARP Loans
What exactly is a HARP loan?
The government created the HARP loan, also known as the “Home Affordable Refinance Program,” to assist underwater homeowners. Underwater homeowners are those that have underwater mortgages with loan principals that are greater than the property’s or home’s free market value.
The Benefits and Drawbacks of a Harp Loan (Pros and Cons of Harp Loans)
At the end of the financial crisis, the mortgage crisis has fallen out of favor. However, many homeowners are also struggling to make their mortgage payments. In response to the financial crisis, the Federal Housing Finance Agency launched the Home Affordable Refinance Program, also known as HARP loans, in March 2009.
HARP allowed mortgagors or homeowners to reduce their monthly mortgage payments or pay down the debt faster by lowering interest rates and allowing them to create more equity.
Harp Loans Throughout History
When the housing bubble burst in the United States in 2008, millions of homeowners were in trouble and were having difficulty making mortgage payments. Home prices fell as inventories rose across the country.
The majority of homeowners saw their home’s value fall below the balance of their mortgages. Later, these homeowners were barred from taking advantage of lower interest rates by refinancing. In addition, banks typically need a loan to value ratio (LTV) of 80 percent or less to qualify for refinancing without private mortgage insurance (PMI).
Following the global financial crisis, the Federal Housing Finance Agency established the HARP loan in March 2009. It was introduced to encourage owners with an LTV of 80 percent to avoid paying mortgage insurance.
The program went into effect on April 1, 2009, and it assisted homeowners in obtaining safe, affordable, and new mortgages. Later, the HARP loan program was expanded to include those with an LTV of up to 125 percent. In the same year, 2009, this initiative was extended.
The rule was modified in December 2011, and “HARP 2.0” was born. The new rule stated that there would be no cap on negative equity for mortgages with terms of up to 30 years. As a result, even homeowners with LTVs greater than 125 percent could refinance without PMI.
Furthermore, the service has been expanded to recognize property owners who have PMI on their advance. Finally, any unused contract moneylender was protected from being held liable for extortion committed on the advance. The program significantly increased the ability of moneylenders to participate in the program.
The HARP loan program expired in December 2018 and is no longer eligible for new refinances. Homeowners with a high LTV ratio, on the other hand, can still profit from today’s low rates by using Fannie Mae’s High-LTV refinance choice.
Advantages of HARP Loan (Pros of Harp Loans)
1) The HARP loan benefits homeowners.
The primary reason for the creation of the HARP loan was to assist and support homeowners. The loan enables borrowers to lower their monthly payments in order to hold their current mortgage or to switch to a more affordable mortgage by converting from an adjustable-rate to a fixed-rate mortgage.
2) Mortgages with PMI are eligible for refinancing.
After, a HARP loan program was launched, which allows homeowners with mortgages that require private mortgage insurance to qualify for the program. Following that, refinancing was made available for all occupancy forms, including residential properties and second homes.
3) May opt out of a home assessment
Homeowners are permitted to forego a home appraisal if an automated valuation model is available in their region. Homeowners must pay initially as part of the application process, and there is no guarantee of acceptance until the fee is charged.
4) There is no borrower income cap for HARP.
The HARP loan program has no applicant restrictions. This service is available to the majority of borrowers. However, it prioritizes those who have underwater homes but can earn a good living in the city or area.
5) Investment properties may be eligible for HARP loans.
Most mortgage refinance plans exclude investment assets, but with the introduction of “HARP 2.0,” it is now possible. Non-owner occupied homes are also eligible for assistance, although there are certain restrictions. In addition, the holiday home or second home must be a single-family residence.
6) A borrower qualification environment that is adaptable
The HARP loan program has slightly more flexible and liberal borrower qualification criteria than other refinancing schemes. The program’s guidelines do not specify a minimum credit score. Similarly, they do not apply a maximum debt-to-income ratio to the borrower.
7) Has the potential to improve your credit score.
HARP loans would not have a negative effect on your credit score. Since it is a refinance product and a new credit entry, you will not be penalized for having a lower payment than the initial mortgage.
The Disadvantages of HARP Loans (Cons of HARP loans) are as follows:
1) The software cannot be used for different purposes.
If you have already refinanced with a HARP loan, you are not able to refinance your mortgages with a HARP loan again. You are not permitted to refinance again, even though the HARP loan rates are adequate and superior to the rate at the time of refinancing.
You may not have the option of returning to the program.
2) There must be two levels of certification.
For applicants seeking a HARP loan, there is an additional requirement criterion. The US government has released certain requirements that applicants must meet before qualifying for the program. Fannie Mae or Freddie Mac can own or guarantee the mortgage.
3) To be eligible for the program, the borrowers must be current on their mortgage payments.
4) Mortgage payments should not be missed at any expense.
They must make mortgage payments at least six months prior to the application’s start date. They cannot have even one late payment in the previous 12 months prior to the submission.
Conclusion of Pros and Cons of Harp Loans
The HARP loan is a lifeline for the majority of homeowners who found themselves in a tough situation during the global financial crisis and beyond. It was a good initiative for underwater homeowners, whose homes were worth less than their mortgage balance. Looking at the benefits, we can conclude that the HARP loan was quite successful.
However, it is not currently accessible and has significant drawbacks. The service is no longer open to new refinances.