When the housing market crashed many homeowners were left struggling to make ends meet. Unfortunately for some, foreclosure became the only option and they lost their home. In an effort to combat the rise in foreclosures and short sales, the government stepped in and started creating programs that would help homeowners regain control of their mortgages. One of these programs has been termed the FHA Obama refinance, although it is actually called the Home Affordable Refinance Program. It defies traditional refinance rules and allows homeowners to get a refinance when they wouldn’t qualify for one otherwise.
Who Benefits from the FHA Obama Refinance
In the grand scheme of things the FHA Obama refinance was designed to have a positive impact on homeowners and the economy alike. The idea behind it was that if the government was able to make it possible for homeowners to save a couple of hundred dollars every month on their mortgage, than that money would trickle into the economy and help pull it out of the slump. It benefits everybody.
On an individual level this refinance will benefit homeowners who owe more on their home than the house is worth and are looking to get a better interest rate, hoping to lower the monthly mortgage payment. These homeowners have to be in good standing on their loan if they want to qualify. This means that you can’t be facing short sale or foreclosure or have any delinquent payments on the house. You must be current on your mortgage and all payments for the past twelve months have to have been paid on time. In addition to these qualifications, the home you want to refinance must also be your primary residence so if you have a primary residence and a rental home, you won’t be able to secure this loan for your rental. As a final qualification, if you purchased your home through a federally insured lender, you won’t be considered for this particular refinance program. HARP was specifically created for homeowners who have mortgages that they secured through conventional lenders, meaning lenders that follow the Freddie Mac/Fannie Mae underwriting guidelines.
Short Refinance vs. HARP
When looking for refinance options that will help homeowners who are dealing with underwater mortgages, you’re going to come across the short refinance and FHA Obama refinance (HARP). These two programs were both designed for underwater situations. The difference is that one is for federally insured homeowners and one is not.
The short refi can be acquired by homeowners who have existing federally insured mortgages. It is similar to HARP in that it is part of President Obama’s Making Home Affordable program. With the short refi you have to be current on all of your payments, as you do with HARP. You must also be able to prove that you can handle the mortgage payments if the refinance is approved. This approval applies to HARP as well. For both refinances, if you are unable to make the payments after the refinance is approved then there really is no point in going ahead with the refinance.
Here is a good place to learn about the short refinance and compare between that and the FHA Obama refinance.
The qualifications that apply to HARP also apply to the short refi, so you must reside in the home you want to refinance, you must be current on your payments, and the refinance has to benefit you financially. The biggest difference between these two refinance options is that with the short refi, the lender agrees to forgive part of the debt, dropping the mortgage to 97.5% of the home’s value. This is not the case with the Home Affordable Refinance Program. With HARP, the homeowner has the option to refinance up to 125% of the value of the home. It does not reduce the mortgage amount, instead it adjusts the terms of the loan so the existing mortgage is more manageable.
If you’re wondering why any lender in their right mind would be willing to take on the risk of a mortgage that is more than the value of the home, or forgive an existing debt to a homeowner, the answer is because the risk is actually less this way. It may seem that the lender takes a hit with these options, and to a degree he does, but a bigger hit for the lender will come if the home is foreclosed on. Lending institutions want to lend money so the interest payments will make them a profit. Getting stuck with a home after it is foreclosed on means they get stuck with a big expense that is not bringing in any income. If the homeowner stays in the home than they avoid this expense, so it’s a win-win for everybody.