In his speech last week, President Obama said that he wants to "take executive action to remove the barriers that exist in the current federal refinancing program (HARP, the Home Affordable Refinance Program) to help more Americans refinance their mortgages at historically low rates, save money and stay in their homes."
Although no formal action has been taken, this is an excellent idea. All homeowners should have the option to refinance, it does not make sense to restrict it to homeowners who are not underwater with their mortgages. It benefits the real estate market, neighborhoods and the recovery to have homeowners be able to afford to remain in their homes. It is better to have a homeowner who is underwater with their mortgage to be able to refinance it at these currently incredibly low rates instead of lose it to foreclosure. The cost of foreclosure to a bank must surely be greater than allowing homeowners to refinance.
In addition to negative home equity being an impediment to refinancing, a spotty income history is also a roadblock. Banks typically want to see an applicant with at least six months of tenure at their current job. Those who are recently retired or are self-employed might face more obstacles as well.
In order to receive the best rates for a 30-year fixed mortgage, credit scores of 740 or better are generally needed. However, banks are more flexible with credit score requirements if the homeowner is applying for a 15-year fixed mortgage; in that case a score in the mid-600s could be sufficient to receive the best rate.
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