Almost 14 million homeowners owe more on their home than it is worth. That staggering figure equates to more than one-fourth of all American homeowners who have a mortgage on their residence. 

Many American homeowners who were underwater on their mortgage, which means owing more on the home than it is worth, have been helped by HARP, an acronym for the federal Home Affordable Refinance Program. Originally set to expire on June 30, 2012 the expiration of the HARP program has been extended to December 31, 2015 and qualification criteria has changed somewhat. The following criteria must be met in order to initially apply for HARP:

• The borrower cannot have any late payments within the preceding 12 months.

• Current loan-to-value, or LTV, must be more than 80 percent. This means that the homeowner must have less than 20 percent equity in the home.

• If the borrower has previously refinanced the current home under HARP, they are ineligible; only one refinance mortgage per residence is allowed under the HARP program.

• The mortgage must currently be with either Freddie Mac or Fannie Mae and, with one exception, one of them must have acquired it before May 31, 2009. The Fannie Mae program was established in 1938 by Franklin Delano Roosevelt to provide federal money to local banks for affordable housing in response to the aftereffects of the Great Depression. In 1970, Freddie Mac was created in order to increase the secondary market for home mortgages, which ultimately made more money available for new home mortgages.

Since the original HARP program left many homeowners stuck with mortgages that were far greater than their homes' values, the federal government revised the program and extended the expiration date. HARP 2.0 is the new program and is available to a larger homeowner base than was the original HARP. Two significant changes were made to HARP 2.0:

• Mortgage holders could qualify for HARP 2.0 even if they had mortgage insurance; this was precluded on the original HARP.

• New lenders are not responsible for any fraud that was perpetrated in underwriting the original loan.

Although the HARP program seems beneficial on the surface, proponents of HARP and HARP 2.0 argue that rather than provide economic relief to those homeowners who are currently underwater on their mortgage, HARP simply forces them into a deeper financial morass. HARP is a refinancing program and as such, has higher interest rates, associated fees and underwriting procedures that are mandated by the provisions of HARP.

Although the HARP provisions provide equal benefits for all homeowners who qualify, larger lending institutions sometimes give preference to their existing customers and those who obtain HARP refinances do not receive the lowest rates no matter their credit rating. In addition, the lenders who process these refinances make a very attractive profit on the mortgage. This means that cash-strapped, underwater borrowers who have already provided one lending institution a tidy profit on the original, higher-value mortgage are now paying for an additional lender profit on the HARP loan.

Before submitting an application for a HARP 2.0 refinance mortgage [1], borrowers should compare several lending institutions. Many times, a smaller lender will prove more aggressive in providing the best terms for the borrower. When searching for the best lender, borrowers should note the following:

• The lender should ask specific, detailed questions about the current loan; HARP loans have many facets and a lender will be unable to adequately provide a viable estimate without knowing these details.

• The lender should specifically ask about existing mortgage insurance and second mortgages/lines of credit on the residence.

HARP loans are fully documented. In other words, borrowers should be prepared with the following items before applying:

• Current mortgage statement.

• Second mortgage and/or line(s) of credit statement(s).

• Proof of income.

• Budget plan.

• Balances and payment liabilities on credit cards, student loans and other obligations.

• Most current income tax return.

• Statement of reasons why the borrower is currently unable to meet the current payment obligation.

Mortgage Application FormThose families or individuals who are contemplating home ownership should make the purchase decision with the head not the heart. Often, it is easy to fall in love with a home that may be overpriced, in a poor neighborhood, need substantial repairs or have other drawbacks. Buying a home is one of the biggest investments of a lifetime. It is essential that prospective home buyers optimize their investment with the following:

• Buy in the best neighborhood possible; for maximum return on the investment, consider the adage of buying a fixer-upper in the best neighborhood possible.

• Be objective rather than subjective and refrain from brash decisions.

• Make sure to allot for extra expenditures such as emergency repairs.

• Exercise patience and don't be discouraged; shop for the combination of the lowest fees and the lowest interest rate.

For homeowners who are underwater on their current mortgage, a HARP refinance mortgage can improve their position but borrowers should be prudent in selecting the lender that provides the best rates as well as the best service for their needs.

By Thomas Caulen

[1] www.makinghomeaffordable.gov/steps/Pages/step-2-program-harp.aspx

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