Some
lenders help credit-blemished borrowers obtain home financing
Your credit report may be full of dings, compounded with a history of
foreclosure and bankruptcy, but you may still get a loan for home purchase,
refinance, or even cash out of your current home. It doesn't matter whether
you have charge-offs, collections, or tax liens on your credit report, as
long as you can meet the specific guidelines for loan approval by a
multitude of lenders specialized in the credit-damaged borrower.
The lending industry uses categories to asses the credit risk of any
particular borrower. If the property checks out and you have sufficient
income, impeccable credit and the required down payment you are considered
an `A' borrower. An `A' borrower can walk into almost any lender and get a
mortgage loan. A borrower can fall short in one of these areas and still be
considered an `A' borrower, as long as the other areas can compensate for
the weakness. For example, a borrower that exceeds the required monthly
debt-to-income ratios (28% housing debt and 36% combined debt) could offer a
large down payment. Many lenders will also excuse modest credit `blemishes'
if a reasonable explanation is provided (i.e. job transition, medical
problems). Being 30-60 days late on one credit card payment is a typical
blemish that could be accepted by a lender.
But what about those that have more serious marks against their credit.
Depending on how tarnished your credit history has been, lenders will
typically place borrowers into the following credit categories, which are
qualified by time frames:
A-minus credit: Acceptable blemishes within the last two
years: Charge-offs, or collection accounts, of minor amounts (e.g. less than
$500 in all) are acceptable. Medical bills, including hospitalization and
clinic visits, are usually disregarded by the lender. As for payment habits,
the borrower can have no more than two 30 days late payments, or one 60 days
late payment on revolving or installment credit.
B credit: Acceptable blemishes within the last 18 months:
Up to four 30 days late payments, or up to two 60 late days payments are
allowed on revolving and installment debt. If the credit ding is an isolated
incident, a 90 days late payment is allowed within the last 12 months.
Charge-offs, or collection accounts, which are isolated, insignificant, and
less than $1,000 in all, are acceptable. However, outstanding collection
accounts less than four years old must be paid. Bankruptcy or foreclosure
that had been discharged or settled previous to the 18 month time frame is
allowed.
C credit: Acceptable blemishes within the last 12 months:
No more than six 30 days late payments, three 60 days late payments, or two
90 days late payments are allowed on revolving or installment credit. Open
collections accounts and charge-offs may not exceed $4,000 and must be paid
in full. Bankruptcy or foreclosure that had been discharged or settled prior
to the last 12 months is acceptable.
D credit: A sporadic disregard for timely payment or credit
standing categories the borrower in this class. Open collections accounts,
charge-offs, and judgments must be paid through loan proceeds. The borrower
who had filed bankruptcy and had been discharged prior to the last six
months is acceptable, as much as the ex-homeowner who had his previous home
foreclosed and settled prior to the last six months. However, mortgage
payments cannot be longer than 90 days past due.
The above are general industry guidelines to make lending judgment on the
borrower's loan application. There are no hard-and-fast rules of separating
the borrower on the border line between one credit category and another.
Also, there are compromising variations between one lender to the next
depending on the degree of subjectivity involved in underwriting and how
much each lender wants to commit their funds.
One leading lender in Southern California, Option One Mortgage Corporation,
has liberalized lending guidelines that blur the dividing line between
A-minus and B credit, by combining the main loan guidelines into one. As per
David Singer, an account manager of Option One, 30 days late mortgage
payments within the last 12 months are allowed up to 4 times in a row. This
category of lateness in mortgage payments is normally considered a B credit,
but could be explained well into upgrading the borrower to the A-minus
credit class.
Down payment requirements are being reduced Typical lenders in the market of
credit-damaged borrowers usually lend only up to 80% of the appraised value
of the home, so the borrower often has to have 20% equity or come up with a
20% down payment for a purchase. This is no longer the case, as recent
months have seen several lenders increase their loans up to 85% of the
home's value for the A-minus borrower, and in one instance up to 90% for the
B-credit borrower. This upward flexibility by several leading lenders in the
credit-damaged market has made it possible for the once-stricken borrower
with modest equity to refinance his/her home, and the once-dispossessed
homeowner to buy a new home with only a 10% down payment.
What about income? The answer is also positive, as the allowable debt-
to-income ratio has also been stretched to increase borrower purchasing
power. A-minus and B-credit borrowers can often allowed to allocate 50% of
their income to pay for combined monthly debt (compared to the standard 36%
guideline used for A credit borrowers), while the bottom rung of the credit
ladder can be stretched to 60%. As for proof of income, some lenders do have
"Stated Income" programs which do not require tax returns, W-2s,
or pay stubs, but may require up to 6-month bank statements to verify income
activity. Such "Stated Income" programs are now available to the
C-credit and D-credit borrowers as well, as per Gene Fulmer, Title West
Mortgage, Tarzana, CA, another mortgage banker specializing in B through D
credit borrowers.
Depending on the extent of the blemishes, borrowers with less-than- perfect
credit histories can expect to pay higher than market interest rates for
their home loan. But if getting into a home or refinancing out of a bind is
one's goal, there are plenty of lenders out there among whom the homebuyer
or borrower can shop around to get the appropriate financing. If you are
having trouble finding a lender that caters to borrowers with less than
perfect credit, you might want to consult with a mortgage broker. Since
brokers typically deal with a multitude of lenders, they might know of
lenders that make such loans
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