Why you should wait until April to get a HARP 2.0 Loan
Just a few years ago, consumers with weaker credit getting a conforming mortgage loan (one designed to be sold to Fannie Mae or Freddie Mac) got a great deal. If you barely qualified with a low 620 credit score, you got the exact same rate as someone with an excellent 800 credit score.
When the mortgage markets collapsed and the housing agencies started hemorrhaging cash, they instituted new fee policies known as Loan Level Pricing Adjustments (LLPA) and Adverse Market Delivery Charges (AMDC) as a means to fix their balance sheets on the backs of homeowners that were still able to obtain loans.
The fees were intended to price loans based on the risk inherent in each loan. LLPA is the more significant of the two fees. It adds fees to a loan based on loan type (purchase, rate and term refinance or a cash out refinance), loan to value, and credit score. To illustrate the impact of the LLPA, a borrower with a 620 credit score will pay a rate nearly 1% higher than a borrower with a 740 credit score.
Because of the inherent risk of HARP refinance, most consumers over 80% loan-to-vale have been hit hard by AMDC and LLPA requirements
HARP 2.0 – Best Change Worth Waiting For
As part of HARP 2.0, AMDC and LLPA rules have been changed, providing consumers who wait a potentially much better interest rate.
- Reduced fees charged by the agencies on loans with a loan to value in excess of 80%.
- On loans with amortizations of 20 years or less, the LLPA and AMDC are eliminated.
- On 25 and 30 year loans, the cap is reduced, which means the borrower with the lower score in the example above saves another .25% in rate.
- Removal of loan to value cap on fixed rate mortgages (effective March 17th 2012) – no equity, no problem. In fact, negative equity refinances will be allowed.
Eliminating the fees on 15 and 20 year loans is significant. Rates on those loans are already well under 4%, so this should open up HARP refinance opportunities for borrowers that are interested in the rapid principal reduction that comes with shorter amortization mortgages.
Not Until After March
When lenders underwrite loans, the first step is to log into Fannie Mae or Freddie Macs computers to get an underwriting decision. These two agencies have indicated lenders won’t be able to do that until sometime around March 17th. To get the better mortgage rates from HARP lenders, you need to wait!
One caution about the changes to the loan to value cap; sometimes lenders do not adopt changes announced by the agencies word for word. Some overlay their own underwriting guidelines and they are always more conservative. While Fannie and Freddie may state they don’t have a loan to value limit for fixed rate HARP loans, many lenders will have a cap.
The agencies continue to tweak their programs with the goal of improving the performance of the loans in their portfolio. If you haven’t refinanced yet, maybe this change is the one that will benefit you.