Poor Credit Needn’t Rule Out Hopes for Real Estate Loan

Lenders are increasingly tough these days on borrowers who are looking to buy a house or refinance an existing loan. The application process can be especially daunting for borrowers with a past bankruptcy, court judgment, recent job loss or even a few less-than-timely payments on a credit card account.

Poor credit doesn’t necessarily mean there’s no way to get a real estate loan.

“Some borrowers have perfect credit, but not a lot of people do,” observed Holly Gracia-Iris, a loan officer at Century Home Loans in Glendale. “It depends on the whole credit history.”

Before borrowers begin applying for any loans, Gracia-Iris advised, it’s essential to get one or more credit reports and review them carefully for any mistakes. These reports may be free if you’ve recently been turned down for credit. Otherwise, the fee is usually between $5 and $10. Credit reports can be obtained by calling one of the major credit reporting bureaus such as TRW, Trans Union or CBI/Equifax, or by contacting a lender or loan broker.

In many cases, Gracia-Iris said, the reports contain erroneous information, such as data about someone else’s accounts. Other times, a creditor may report a payment 30 or more days late when in fact it wasn’t late at all.

“People can call their creditor directly and contest reports made to a credit reporting bureau,” Gracia-Iris said. There are those who prefer to hire a credit consultant to do it for them, she said, but “you may have better luck cleaning up your own credit.”

Most credit reports go back about seven years, Gracia-Iris noted, but the last year’s payment history is what matters most to real estate lenders. Each lender, of course, has its own rules.

“We have a variety of lenders that we can shop around with,” Gracia-Iris said. The strictest are lenders who conform their mortgage loans to Fannie Mae and Freddie Mac standards for resale in the secondary market. The most lenient are so-called hard-money lenders who don’t care about your credit rating, only about your equity in the property. Money from these lenders, though, can get very expensive.

“The most common problems we see are items in a credit report that the borrower hasn’t reported,” said Sam Lyons, senior vice president of mortgage banking at Chatsworth-based savings and loan Great Western Bank. Some applicants, Lyons said, have failed to report losing their job, facing a court judgment or having a lien on their property. “An unintentional omission is OK, but hiding things from the lender is a turnoff.

“Even a prior bankruptcy isn’t uncommon anymore among borrowers. We would, though, take a hard look at what’s happened since the bankruptcy. The key is having all documentation ready for the lender including letters that explain possible problems.” For borrowers who are refinancing, he said, the most important factor is how consistently they have paid the existing loan.

Lenders are becoming increasingly aware of red flags that cause them to question a borrower’s credit-worthiness.

“We’re seeing an unprecedented level of fraud in loan applications,” Lyons said. This includes providing phony tax returns that exaggerate income, special letters and testimonials from people who claim to owe the borrower large sums of money, and paper transactions that are designed to make assets look like they’ve ballooned.

“When you look at a loan package, you get a feel for the person,” said Shelly Klimusko, senior loan officer at Metrociti Mortgage Corp. in Encino. The best policy, she said, is to be upfront with the lender.

It’s also better to clean up your credit before approaching a lender, she said.

“We are running into a bunch of errors reported by credit bureaus lately,” Klimusko said. “Creditors are more than happy to remove negatives from your credit if you give them a good reason to.”

She suggests that individuals compare canceled checks with the payment records of creditors reporting late payments. Late payments may be removed by the creditor or an individual may opt to write a memo explaining these late payments to a prospective lender or loan broker.

When lenders compute a borrower’s maximum debt load, they take 5% of credit card balances and figure that number into the monthly debt service ceiling. Many cards require less than a 5% payment, however, and this should be brought to the attention of a lender.

Surprisingly, bounced checks don’t get reported by your bank to credit agencies, Klimusko said. Why? One reason, said Klimusko, is that it would be a bookkeeping nightmare. A lender may, however, send a letter to your bank asking how you’ve handled your accounts. About 60% to 70% of her borrowers have nearly perfect credit, she said. About 5% are “mediocre” and another 5% are “really, really, really bad.”

“People are rejected for a variety of reasons. We’ll listen to their explanation,” said Robert Benson, executive vice president at The Money Store Inc. in Encino. Despite the willingness to listen, however, “if someone has had a problem all their life with credit, sorry, we can’t help them,” Benson said. “If you have certain negatives there’s no way we’ll make you a loan no matter how much equity you have.”

The Money Store makes only fixed-rate secondary and home refinance loans. Borrowers with lots of equity in their home but no job will probably still have a problem qualifying at The Money Store, Benson said. For these borrowers, hard-money lenders are sometimes the only option.

Those interested in obtaining a credit report may want to contact the following credit reporting bureaus. Telephone TRW at (800) 392-1122. Trans Union’s number is (800) 922-5490. CBI/Equifax can be reached at (408) 629-3377. And, Prentice Hall, which reports liens, judgments and other legal problems, is available at (714) 547-0590.

Prospective borrowers who have credit problems may also want to consider getting a co-signer or guarantor on their loan, Gracia-Iris advised. Other possibilities include a bigger down payment or a smaller loan balance.

Whatever the problems are, “it’s better for the client to be upfront,” Gracia-Iris said, “and you have to have a strong paper trail.”