Home Affordable Refinance Program (HARP) and Subordinations

HARP approved first loan with a Subordination:  Subordinating lender approval is not always granted.

To the surprise of many lending professionals becoming familiar with the newly released guidelines for what many have coined as HARP 2.0,  they are learning that the subordinating lender may not necessarily approve the subordination.   While declines are not the norm it can happen and derail the refinance transaction placing further burden on borrowers who are trying to benefit from historic low interest rates.

One of the most common responses from a loan officer who learns that the subordinating lender has declined to subordinate to a new first loan approved under the new HARP 2.0 program is “you can’t be serious, they participate in the HARP program so they should approve it!”  The answer is not necessarily.

Subordinating Lender Defined & HARP participation

Lenders that have provided homeowners with Home Equity Lines of Credit are commonly referred to as a second lienholder.  They are in second lien position behind the homeowner’s primary lender (which could also be the same lender).   The lender is in a subordinate position and is the “Subordinating Lender.”  While the subordinating lender participates in the HARP program they do not “automatically” approve the subordination.

Because the subordinating lender is in a subordinate position they have to protect their financial interest in a market where declining home values have eroded the equity of the property.  Everyone knows that lenders Home Equity Lines are getting wiped out with short sales and foreclosures.   Underwriting by the subordinating lender is required and the homeowner and property must meet their guidelines.

Subordinating lender underwriting guidelines

The subordinating lender will require the homeowner to meet the lender’s underwriting guideline such as DTI (debt-to-income ratios), CLTV (cumulative loan to value: the ratio of the loans secured by the property and  the value of the property, FICO credit scores, appraisal and other requirements.

From our experience (Note: our company does not underwrite the subordination) most subordinations that are declined are due to high debt to income ratios over 50-55% coupled with poor credit scores or other factors.    It is much more common for a straight approval or a conditional approval.  In a conditional approval, it is possible that the subordinating lender may require the existing line of credit to be reduced to the outstanding balance or reducing the new first lender’s loan amount to make the CTLV’s comply with the subordinating lender guidelines.  Sometimes this means the borrower may have to come to closing with funds they were not planning for.

Many lenders do have DTI caps of 50-55% and will not approve a subordination where the borrowers debit to income exceeds that level under any circumstances.   Some lenders also allow up to a maximum of $5000.00 or 2-3% in allowable closing costs to be rolled into the new loan over payoff.   For example, if your existing first loan payoff is $100,000 your new first loan cannot be higher than $105,000.

The good news is that the majority of subordination requests are approved.


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