Homeowners who have been locked out of HARP may have another chance to refinance with Fannie Mae’s new conventional 97% LTV “mini-HARP 3.0” program.

Fannie Mae and Freddie Mac announced new refinances requiring as little as 3% equity, effective December 13, 2014.

The news comes as a welcome surprise. Homeowners who refinanced or purchased a home after May 31, 2009 are not eligible to refinance with HARP. With today’s record low interest rates, the new 97% refinance program could help homeowners finally reduce their payments.

Many households have seen their property values rise, but are still suffering from low home equity. These new programs could make the difference and finally allow struggling homeowners to refi.

New 97% Refinance Rules

The new conventional 97 refinance rules will open up eligibility for many homeowners. There are two types of 97% LTV refinances, one offered from Fannie Mae, and one from Freddie Mac.

That doesn’t mean you have to go to these two agencies directly for the loan. They don’t issue loans themselves. Instead they write the rules used by the vast majority of lenders across the country. The new Fannie/Freddie programs make it possible for borrowers to receive this mortgage from most lenders.

Fannie Mae’s 97% LTV Refinance

The new Fannie Mae refinance rules allow a homeowner to have just 3% equity in their home. Prior to the change, lenders required a minimum of 5% equity for a refinance, but often wanted 10%.

But according to Fannie Mae’s research, there’s no significant difference in default rates between homeowners with 10% equity and those with only 3%. This is why Fannie Mae loosened guidelines. Today’s HARP ineligible applicants can qualify to reduce their payments if they meet these standards:

• The loan is owned by Fannie Mae, as determined by the Loan Lookup Tool or other verification.
• Maximum loan amount of 97% based on the home’s current appraised value.
• The property is the borrower’s primary residence
• The new loan is a fixed rate mortgage.
• The property is a one-unit single family home, condo, co-op, or PUD. Manufactured homes not permitted.
• A mortgage insurance (PMI) policy is attached to the new loan.

The lender takes care of opening a mortgage insurance policy for the loan. This could add monthly cost to the loan, but the overall payment could still be less than the current loan’s monthly cost. Plus, PMI is cancellable as soon as the loan balance reaches 78% of the home’s value.

Reduced PMI is available through Fannie Mae’s My Community Mortgage program. Borrowers must meet certain income guidelines for their area to qualify.

Freddie Mac 97% Refi: Home Possible Advantage

The primary advantage to Freddie Mac’s version of this refinance program is that the current loan does not have to be owned by Freddie Mac or Fannie Mae. Here are the guidelines:

• The property is a 1-unit home, condo or PUD.
• The new loan is a 15-, 20-, or 30-year fixed rate mortgage.
• No cash out is allowed.
• Non-Freddie Mac and -Fannie Mae loans permitted.
• Borrowers must be at or below income limits for their area.
• The current loan is not an FHA, VA, or USDA loan.
• The new loan amount is $417,000 or below.
• The current loan is not a HARP loan.

Home Possible Advantage eligible homeowners also qualify for reduced PMI. More homeowners can make refinancing pencil out. The bottom line is whether the new loan saves the borrower money each month or not. If it does, homeowners benefit.

Many homeowners lost value in the real estate crash, value that is now returning. While values are bouncing back, many still have too little equity for a refinance – until now. The new regulations will help homeowners who are not eligible for HARP nor a traditional refinance.

Differences Between HARP 2.0 and the New 97% Refinance

HARP rules state that homeowners who opened a mortgage on June 1, 2009 and later are not eligible. The new 3% equity refinance has no such rule.

Many people purchased or refinanced homes in 2010 when rates were near or above 5%. Rates have dropped dramatically since then, leaving many of these buyers without a refinance option.

Here are the ways the two programs differ:

Before the new 3% equity program, homeowners with less than 5-10% equity in their homes would need to apply for an FHA refinance. That loan comes with permanent, high-cost mortgage insurance.

With the new “mini-HARP 3.0” program, mortgage insurance is still required, but automatically drops off when the loan balance reaches 78% of the last appraised value. The new Fannie Mae conventional 97 rules allow for a more cost-effective refinance option than FHA.

Who Does the 97% LTV Refi Help?

The new HARP 3.0 alternative will not help everyone, but it will allow many HARP-ineligible owners to lower their payments. Here is a snapshot of homeowner profiles the new Fannie Mae and Freddie Mac programs are likely to help.

• Homeowners who purchased or refinanced after May 31, 2009.
• Homeowners who are not otherwise eligible for HARP 2.0.
• Moderate income families who do not have a Fannie Mae or Freddie Mac loan.
• Households who have seen their property value rise, but not quite enough for a standard refinance.

The new program comes just in time, while rates are at record low levels and are projected to stay that way for some time.

Apply for the conventional 97% “mini-HARP” Refinance

Homeowners who are ineligible under current HARP rules and previous refinance rules might now qualify.