The Fannie Mae High LTV Refinance Option (HLRO) is worth a look for underwater homeowners that would like to take advantage of today’s low rates, but don’t have enough equity to qualify for a traditional mortgage. If you’ve recently purchased your home and the mortgage balance is higher than your home’s current value, then HLRO is worth a look. Not only may it help you lower your interest rate it may help lower your monthly mortgage payments too.
Fannie Mae’s High LTV Refinance Option (HLRO) is designed to help underwater borrowers.
It may seem unlikely that underwater borrowers exist in today’s real estate market. After all, home values have been soaring nationwide. According to the National Association of Realtors, March home prices were up 3.8 percent from 2018 for the 15th straight month of year-over-year gains.
The wider story is different. Home values have not risen for every property. More than five million U.S. homes are “seriously underwater” according to research from ATTOM Data Solutions — meaning properties with a mortgage balance that’s at least 25 percent higher than the property’s fair market value. For example, a property worth $225,000 that has $300,000 in debt is virtually impossible to refinance.
Because of this borrowers with underwater homes are stuck with mortgage rates above today’s levels. And, those higher rates also mean higher monthly mortgage costs.
Fannie Mae’s High LTV Refinance Option (HLRO) Guidelines
HLRO is not available for all homeowners. There are some basic qualifications that must be met in order to be eligible.
- Your current loan must be owned by Fannie Mae. You can check mortgage ownership by using the Fannie Mae Loan Look-up Tool. (If you have a conventional loan and it’s not owned by Fannie Mae, then it’s likely owned by Freddie Mac. Learn more about Freddie Mac’s high LTV refinance option.)
- Your loan must have originated after October 1, 2017.
- Your current loan must be “seasoned” at least 15 months. This means that at least 15 months have passed from the note date of the existing loan to the note date of the new loan.
- Your current mortgage must be first-lien financing and not a home equity line of credit (HELOCs) or second mortgage.
Benefit to the borrower
Fannie Mae requires borrowers to get a material benefit from refinancing — also known as a net tangible benefit — otherwise a new loan is a waste of money for all involved.
Fannie Mae looks for at least one of the following benefits to occur:
- Lower monthly mortgage payments
- Lower interest rates
- Shorter loan term
- Move to a more stable mortgage product (like an adjustable-rate mortgage to a fixed-rate mortgage)
Maximum loan-to-value (LTV) ratio
There is no maximum LTV because the program is designed for borrowers with little or no equity — you can have an LTV of 99% or higher, for example. In an odd twist, though, there’s a minimum loan-to-value ratio. Basically, if you have enough equity to qualify for another Fannie Mae loan product, you cannot use HLRO financing. For example, if your loan-to-value ratio is 95% (you have 5% equity), then you’re eligible for another refinancing program.
The program is open to properties with one to four units and for owner-occupants or investors, though, the minimum LTV requirements differ by property type.
- 1-unit: 97.01%
- 2-units: 85.01%
- 3-4 units: 75.01%
- 1 unit: 90.01%
- 1-4 units: 75.01%
Investment Property Note: The property cannot be a condo or co-op hotel or motel, houseboat project, or a timeshare or segmented ownership project (pdf, page 5).
Maximum debt-to-income (DTI) ratio
There is no maximum debt-to-income ratio requirements for HLRO loans for most borrowers. That said, your lender might have their own requirements. Most lenders want borrowers without a lot of debt — meaning your recurring debt payments like auto loans, credit cards, etc. aren’t over a specific percentage of your gross monthly income (the money you earn before taxes).
For example, if your household earns $5,000 per month in gross income and your recurring monthly payments are $2,850, then your DTI is 43%. This is an acceptable percentage for many lenders, though, some will go up to 45% DTI.
You must be current on your mortgage payments in order to qualify for HLRO. The following standards must also be met:
- There can be no 30-day delinquencies in the most recent six months.
- There can be no more than one 30-day delinquency in the past 12 months.
- There can be no delinquency greater than 30 days.
Credit score & income verification requirements
There are no credit score requirements to qualify for a HLRO loan. This refinance loan is intended to replace your existing financing with a new loan, so lenders are not required to pull a credit report or check for a minimum credit score.
Lenders are not required to verify income amount or assess continuity of income, but they must obtain one of the following:
- Verbal verification of employment or self-employment income for at least one borrower
- Documentation for non-employment income source like a pension
- Documentation of liquid financial reserves equaling 12 months of the new mortgage payment, including taxes and insurance
Some loans will require an appraisal, while others are eligible for an appraisal waiver. Since there is no maximum LTV, though, you shouldn’t worry about the appraised value coming in too low if it can’t be waived.
These scenarios are not eligible for an appraisal waiver:
- Properties located in a disaster-impacted area
- Two- to four-unit properties
- Leasehold properties
- Co-op units and manufactured homes
In addition, these scenarios require an appraisal:
- When it’s required by law
- When the borrower is using rental income from the property to qualify for the new loan
- The lender believes it’s warranted based on information about the property or events like a natural disaster
If you currently have mortgage insurance on your loan, then it must be transferred to the new loan. But, if you aren’t currently required to have mortgage insurance, then it won’t be required for the new loan.
When does HLRO expire?
This program isn’t set to be around long. Lenders must get their loans delivered to Fannie Mae by September 30, 2019, which means applications should be submitted to the lender 30 to 60 days before that date to ensure the loan closes on time.
No one knows if the HLRO program is set to be extended. If you’re interested in using the HLRO program to see if you qualify for lower interest rates and monthly payments, it’s best to apply now, while the program is still available.