The collapse of the housing market in 2007 brought about a plethora of assistance programs aimed at helping distressed homeowners. The government's initiative, Making Home Affordable, offers a refinance option that replaces a high-risk loan with a more affordable, sustainable loan insured by the Federal Housing Administration. The benefits of the program on a borrower's financial situation are many, however, its impact on credit scores could be a different story.
The Home Affordable Refinance Program refinances a non-government-insured loan backed by Fannie Mae or Freddie Mac with an FHA-insured loan. FHA ensures the lender that finances the loan of repayment if the borrower defaults. The HARP involves a loan application, underwriting and settlement fees. It differs from a traditional refinance because it can be done on a loan with an outstanding balance that exceeds the fair market value of the home used as collateral. The new loan amount may exceed 125 percent of the home's value, allowing borrowers severely underwater on their home loan to refinance.
Changes to credit accounts, including mortgages, can negatively impact scores. The Fair Isaac Corp., which created the FICO credit scoring system that most lenders rely on, noted that borrowers with the best scores have more to lose than those with low scores. Because the HARP replaces an old account, a line of credit is closed and a new one is simultaneously created. The FHA-insured loan is reported to the three credit bureaus, Experian, TransUnion and Equifax, as a new loan with a new open date. This makes it look like a new account, and new accounts can diminish scores.
A HARP refinance is less hurtful to your credit than foreclosure, missed payments or foreclosure alternatives which can drop your score dramatically. A late payment can reduce a score by 40 to 110 points, depending on the strength of the score before the late payment. A foreclosure can cost you between 85 and 160 points. HARP is only available to borrowers who are current on their mortgage and have no late payments -- more than 30 days delinquent -- in the previous six months. A borrower may have up to one late payment within the past 12 months and still qualify for the program.
Although it does not reveal the precise number of points lost during a refinance, FICO's website MyFICO indicates that an inquiry into your credit history in the application process slightly diminishes scores. Multiple inquiries by different lenders further lower scores, as each lender pulls its own credit report. A borrower may apply for the HARP among various lenders to get the best interest rate and terms. Although all participating lenders adhere to HARP's general provisions, lenders may add their own internal requirements called overlays, Bankrate.com says.