If you’ve never heard of a Freddie Mac Enhanced Relief Refinance — a “FMERR” loan — you’re not alone. Available to homeowners since the beginning of the year, it’s a refinancing option that helps property owners with little or no equity. The trick? It ignores usual lender requirements for a high loan-to-value (LTV) ratio. This means that homeowners who have not experienced the rise in home prices or are upside down in their mortgages may be able to get a lower interest rate with the help of FMERR.
Real estate prices have generally been rising — but not for everyone.
According to ATTOM Data Solutions more than 5 million U.S. properties — 8.8% — were “seriously underwater” in the fourth quarter of 2018. These are properties where mortgage balances are at least 25% higher than market values. For example, under the “seriously underwater” standard, a home that might sell for $300,000 has at least $400,000 in outstanding mortgage debt.
The FMERR program is open to homes that are seriously underwater and also those that are slightly upside down or only have a little bit of earned equity. Consider a property with a $300,000 fair market value and $298,000 in mortgage debt — it has equity, but not enough to refinance under most mortgage programs.
This not-so ideal home financing situation is problematic for homeowners.
First, homeowners cannot sell unless they pay off the outstanding mortgage debt. This means bringing a big chunk of cash to closing — cash many borrowers simply don’t have. In effect, these homes can’t be sold, which is one reason the real estate marketplace has an inventory shortage.
Second, older existing loans often have high interest rates, so borrowers have large monthly payments. But, if homeowners refinance at today’s rates, then their monthly payments may be much lower.
Lower mortgage payments are good for the lender too. Lower costs make homeownership more affordable, which translates to less risk for the lender.
Freddie Mac Enhanced Relief Refinance Qualifications
FMERR is not a come-one, come-all deal. There are some basic standards that must be met to qualify.
- Your current loan must be owned by Freddie Mac. (You can check mortgage ownership by using the Freddie Mac Loan Look-up Tool.)
- Your loan must have originated after October, 1, 2017.
- Your current loan financing must be “seasoned” at least 15 months. This essentially gives Freddie Mac the opportunity to see how you’ve been making payments.
There are some additional requirements that you must meet to be eligible for FMERR.
Maximum loan-to-value (LTV) ratio
There is no maximum loan-to-value (LTV) ratio for FMERR. You can be wildly underwater and still potentially qualify. If your home is worth $350,000 and you owe $375,000 FMERR may be able to help you lower your monthly payments.
With the Freddie Mac Enhanced Relief Refinance program a lack of equity is okay. In fact, it’s required. If you have enough equity to refinance with other Freddie Mac programs like its 97 LTV refinance program — you can’t use the FMERR loan.
Maximum debt-to-income (DTI) ratio
There is no maximum debt-to-income ratio for FMERR loans in most cases. However, there are some uncommon scenarios where lenders limit the DTI to no more than 45%. Those scenarios include:
- You switch from an ARM to a fixed-rate loan and your monthly payment increases at least 20%.
- You refinance a really small loan, say $50,000. Under federal rules, lenders can charge higher fees for small mortgages. The purpose of this rule is to help lenders cover fixed costs.
- The loan will have different borrowers — someone who co-signed the old loan will not be on the new one.
While Freddie Mac doesn’t have a maximum DTI, your lender might. Lenders want borrowers who do not have too much debt. They’ll compare recurring debt costs for things such as housing, auto loans, student debt, and credit card payments with your gross monthly income — the money earned before taxes. For example, if your household has $8,000 per month in gross income and your recurring monthly costs are $3,440, then your DTI is 43%, which is a DTI level acceptable for many lenders.
You must be current on your mortgage payments in order to qualify for FMERR. You must also meet the two following standards:
- You had no delinquencies in the past six months.
- You had no more than one 30-day delinquency in the past 12 months.
Also, be aware of “layering” — additional requirements created by lenders above and beyond these Freddie Mac standards. Lenders use layering to reduce risk and different lenders have different appetites for risk. For example, lender A might allow no more than one delinquency in the past 18 months, while lender B is okay with one delinquency every 12 months.
Credit score requirements
No, you do not need a 720 credit score to qualify for a FMERR loan. It’s considered a streamline refinance, which replaces your existing financing with a new loan, so there’s no minimum credit score to qualify.
Other questions about FMERR
Is FMERR restricted to primary residences?
No. You can finance other properties as well. The minimum LTVs include:
- 1-unit: 97.01%
- 2-units: 85.01%
- 3-4 units: 80.01%
- 1-unit: 90.01%
- 1-unit: 85.01%
- 2-4 units: 75.01%
How do FMERR interest rates compare?
In general, FMERR rates are comparable with other financing options. To determine what rates you’ll qualify for, you’ll need to speak to a lender.
Will my monthly payment go down with a FMERR loan?
With a lower interest rate you will most likely see a smaller monthly payment. But, this isn’t always the case. For example, monthly payments may increase if you switch from an ARM to a fixed-rate mortgage or to a shorter-term loan.
When does the FMERR program expire?
The FMERR program is set to end September 30, 2019 — your refinance must CLOSE before this date. This means you need to apply 30-60 days beforehand to ensure the loan will close in time.
If you’re wondering whether the FMERR program will be extended, no one knows. But, it’s not something to count on. The better strategy is to apply now, while the program is unquestionably available.