The Home Affordable Refinance Program (HARP) is a program of the federal government aimed at helping mortgage borrowers, particularly those with little or negative equity for a traditional refinance. When it first debuted, it didn't impress. A big reason for HARP's failure was that it depended on lenders voluntarily reducing the interest rates of captive borrowers who were repaying their loans.

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A new version of HARP, dubbed HARP 2.0, was announced in late 2011 to try to address some of the original HARP's shortcomings, and Fannie Mae and Freddie Mac released guidelines on the new program in November.

If you're underwater and have a Fannie Mae or Freddie Mac loan in good standing, you may be able to refinance to a lower rate today. (You cannot get a HARP 2.0 refinance is you've already gotten a HARP refi under the old program, though.) Here's an overview of the HARP 2.0 changes.

Major changes with HARP 2.0

Borrowers no longer captive

With HARP 2.0, homeowners can go with any lender willing to refinance them -- and mortgage lenders should be more willing now than in the past to finance your home. Previously, mortgage lenders took a risk in refinancing underwater borrowers because Fannie and Freddie might force them to take back bad loans, but that's changed. In particular:

  • Fannie Mae will not impose any maximum debt-to-income (DTI) ratio or other underwriting criteria as long as the payment is not increasing by more than 20 percent (which could happen if, for example, you refinance from a 30-year loan to a 15-year mortgage).
  • Fannie Mae will not require the lender to guaranty that the borrower has an acceptable credit history (other than mortgage payment history requirements of this HARP program).
  • Fannie Mae will not hold the lender accountable for undisclosed liabilities (except when the payment increases by more than 20 percent).

Fees have been lowered

Another drawback to the first go-round of HARP was the fee structure. Risk-based surcharges increased the cost of refinancing to the point that the added costs often offset the savings significantly. Those fees have been lowered with HARP 2.0, particularly benefiting those who own homes in declining markets:
  • The "Adverse Market Delivery Charge" (AMDC) is dropped altogether, saving 0.25 percent.
  • The cap applicable to the sum of the loan-level pricing adjustments and the AMDC on HARP mortgage loans with amortization terms greater than 20 years is reduced from 2.0 percent to 0.75 percent.
  • Property appraisals are not required, as long as your mortgage payment is not increasing by more than 20 percent.

Lender liability reduced on guaranteeing borrower income

HARP 2.0 takes lenders off the hook in guaranteeing your income, liabilities and credit rating -- so it appears that HARP 2.0 could help homeowners refinance even if they have bad credit.

If you're interested in a refinance under HARP 2.0, read more about refinancing with bad credit and start the process to obtain lender quotes.