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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 judgements 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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