Should We Do a HARP Refinance or Short Sale Our Underwater Home?
Question: Should We Do a HARP Refinance or Short Sale Our Underwater Home?
A reader asks: "My husband and I are trying to figure out if we should try to sell our home as a short sale or hang on to it and apply for the government HARP refinance program. Our real estate agent is telling us to sell, but we like the idea of reducing our mortgage payments. We owe almost $300,000, and while the value of our home is about $165,000, our mortgage guy says we can save $635 a month if we qualify for a HARP refinance. What do you suggest? Should we do a HARP refinance or short sale?"
Answer: Whether a homeowner should short sell versus a HARP refinance is not that cut and dry. Sure, in most cases, logic would dictate that a homeowner is probably better off in two years after a short sale than after a HARP refinance, but there many things to consider before making that decision.
First and foremost is whether you will qualify for either program. Many short sale banks have loosened requirements for a short sale, and not every lender requires a financial hardship, especially after 2012. However, if your bank requires a financial hardship and you cannot document a hardship, then you might not qualify for a short sale at all. Which would make the question a moot point, right?
So, the first thing I suggest you do is talk with a short sale agent to figure out if you will qualify for a short sale. Consider the government HAFA short sale program if a regular short sale is too restrictive.
But if you go the HAFA route, make sure you really want to do the short sale before applying for HAFA. Some lenders will not allow you to reapply once you prequalify, if you should change your mind upon approval.
It is important to note you can't do both. You must choose one program. Either the HARP Refinance or the short sale.
Qualifying for HARP Refinance
- Limited to Fannie Mae and Freddie Mac loans.
The HARP refinance program applies only to loans held by Fannie Mae or Freddie Mac. If your loan is not Fannie Mae or Freddie Mac, you will not qualify. You can find out if your loan is Fannie Mae or Freddie Mac by going to the Fannie Mae Loan Look Up or the Freddie Mac Loan Look Up. You will need to know the primary borrower's last four digits of Social Security number.
- Loan origination June 1, 2009 or earlier.
If you took out a mortgage on June 2, 2009 or later, you will probably not qualify for the HARP Refinance. There are no exceptions at the moment but that could change.
- More than 80% LTV
If your home is underwater, your LTV (loan-to-value ratio) will exceed 80% of market value -- because market value is generally less than your loan balance. Most people have no problem with this qualifying factor.
- No late payments.
Although the HARP Refinance program allows one late payment in the previous 12 months, many lenders will not make a loan to a borrower who has been delinquent, regardless of the HARP guidelines. These additional lender requirements that might differ from those laid out in the program are called overlays.
- First HARP refinance.
Unless the rules change, and with one small exception, you can do only one HARP refinance and, once granted, you cannot refinance through HARP again. However, if after the HARP Refinance, you have problems making the payments, you can always at a later date apply for a short sale.
HARP Refinance Vs. Short Sale
The short sale guidelines for buying another home after a short sale are typically 5 years for a conventional loan and 3 years for FHA loans. Let's say you did a short sale instead and sold your home. The drawbacks to a short sale are:
- You no longer own a home.
- You have to move elsewhere and become a renter.
- You might have to move out of your neighborhood.
- You will lose your tax deduction for owning a home.
- There is no guarantee you will qualify in even 3 years to buy another home because personal situations change and laws change.
If you chose the HARP refinance option, in 2 years, you will have saved $15,240 ($635 payment difference x 24 months). In 3 years, you will have saved even more, $22,860. Will the market value of your home increase to make up for the fact you still owe about $300,000 on a home that is worth $165,000?
It might not matter. The reason it might not matter is because you might not ever want to sell. This means you will continue to pay on the home until you have paid off the $300,000 mortgage.
If you chose the short sale, however, at the end of 3 years, you might qualify to buy another home. If you believe home prices will remain relatively stable over this time period, this means you could buy a home just like the home you sold, except at today's market value of $165,000. Even if interest rates doubled, your payment would still be lower than the payment you pay today.
But for some people, it is not a matter of logic or financial reasoning. And that's OK, absolutely OK. People often buy real estate on emotion and they stay in that home based on emotion. Don't ever feel bad if you choose the HARP refinance over a short sale. Whichever decision you make is the right decision for you.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.