Sub-Prime Mortgage Loans
by John Gunther
November 1997
So, you have read the newspapers, seen the articles, and talked to your friends....REAL ESTATE IS GOOD AGAIN. Home prices are on the rise, and you think maybe it is about time to take the plunge. Prices are still relatively low and now is a good time to buy. If you already own a home, you also know that mortgage interest rates are very low, and now could be a good time to refinance. Who wouldn't want lower payments?
OK, this is a good idea. Only one small problem.....you have a few negative ratings on your credit report. You have even been down this road before, and the answers were all the same...NO.
Well, times have changed in the mortgage lending industry, and there may be a program for you, now.
Many lenders have adopted Sub-Prime Mortgage programs, and have the ability to fund loans for people with less than perfect credit. Let's start here...what exactly is Sub-Prime?
Sub Prime can have two definitions...first, all residential loans that are generally not eligible for sale to FNMA, FHLMC, or the Jumbo Conduits (loans over $214,600) are considered sub-prime. Additionally, sub-prime is the term for any loan transaction where the borrower has had delinquencies on a regular or extensive basis. The credit is broken into three primary categories...Mortgage Credit, Consumer Credit, and Public Records. The first one is obvious...your payment history on your existing, or previous mortgage. Obviously this relates to people who have owned a home before. The second category relates to credit cards, installment loans, student loans, and any other forms of debt. The third category relates to public records such as previous bankruptcies, judgements, foreclosures, etc.
Your lender will evaluate the nature of your current delinquencies, past lates, and Grade your credit. A borrower will typically fall into one of FIVE categories: A, A-, B, C, or D. The A borrower can have a 30 day late on the existing mortgage within the last 12 months. The D borrower could currently be in forclosure. Yes, even this guy could get a new loan. How is this possible? First, it is primarily based upon the equity in the home. The rule of thumb for these sub-prime loans is the greater the equity in the property, the weaker the credit can be. Conversely, the less equity, the better the credit must be. As an example...an A borrower who has been 30 days late on a mortgage and also 30 days late on minor credit card debt could qualify for a loan of up to 90% of the value of the house. A D borrower, on the other hand, who is currently in foreclosure, could save his house if the equity is 40%.
Let's look at an additional example...we have a couple who had an interruption in employment last year, and fell behind on a few items. The car fell behind by three months, the mortgage fell behind by two months, and a couple of the credit cards were as much as 90 days late. In all likelihood, you would be rated a B credit, and would be eligible for a loan of up to 85% of the value of the property. This would be for either a purchase or a refinance transaction. Currently, interest rates for a B credit grade loan range from the 8% level on an adjustable mortgage, to approximately 10.5% on a fixed rate loan. Granted, these rates are not as low as those for a prime borrower, but they are reasonable for the above credit history.
Another thing to think about.....when did your credit problems occured. For most Sub-Prime lenders, the main concern is for the last 12 months. If your problems are over one year, it is very likely that the negative credit will not be counted against you. Some lenders review credit history for two years, so it is important to check with the lender on your particular loan. In any event there is probably a loan out there for you.
A decade ago, when borrowers had credit problems, they often had to resort to borrowing money from private parties or hard money lenders; the secondary market only purchased prime loans. Today, sub-prime loans are sold into the seconday market, in the same manner as prime loans.
Needless to say, there are literally thousands of scenarios for credit problems and many legitimate reasons why people have had their problems. Today, past credit problems does not necessarily prevent people from buying a home or refinancing the one they are in. Money is plentiful, and there are many lenders with programs designed to help get people back on their feet, financially speaking.
Call your local Mortgage Banker, or Broker and ask them what programs they offer. You might be pleasantly suprised to find out youÕre not the bad guy you thought you were.
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