Lenders Ready to Help Credit-Scarred Consumers
Scrambling to find new borrowers in a time of rising interest rates and moribund loan demand, mortgage lenders are becoming increasingly accommodating to credit-scarred consumers who once would have been turned away.
In the past few months, several companies have launched loan programs geared specifically to prospective home buyers who have had credit woes ranging from numerous late payments to bankruptcies and foreclosures. And lenders without formal programs say they are ready to be flexible--particularly if the borrower’s credit woes stemmed from a job loss or recession-related event largely out of the individual’s control.
All this spells opportunity for wanna-be homeowners--even if they’ve been rejected for a mortgage in the past. Although there have always been a handful of lenders willing to make mortgages to so-called “sub-standard” risks--for a price--the number of lenders in this market has recently started to boom. And that has resulted in greater loan availability and more reasonable interest rates and fees, experts maintain.
“The whole lender community is looking at this,” says Robert M. Rosenblatt, director of surveys and statistics at the Mortgage Bankers Assn. in Washington, D.C. “They’re looking for growth opportunities. And this is an area that they may have overlooked before.”
The attention to second-tier risks is a major departure for mortgage lenders, which had become increasingly strict after back-to-back years of record loan demand in 1992 and 1993. But it’s no coincidence.
Interest rate hikes that started in February have decimated loan demand. Currently, experts estimate that loan volume is down by 40% or 50% from year-ago levels. For the year, largely thanks to a strong first quarter, mortgage originations are expected to drop by about 30% to roughly $700 billion from more than $1 trillion a year ago.
As mortgage volume began to dive, lenders started to scramble to find business. That’s led to rapid development of new mortgage products, including programs geared to individuals with checkered credit histories.
St. Louis, Mo.-based Prudential Home Mortgage, for example, launched a “flexible home financing program” this summer that drastically lowered the hurdles to qualify for a mortgage. Specifically, Prudential says it will overlook past credit problems if the consumer has steady income and readily pays his or her debts. It won’t hold minor charge-offs or collection accounts against you, and it will try to create a credit history for those who do not have one by tracking rent or utility payments.
ARCS Mortgage goes a step further. You can have a home foreclosure or even a bankruptcy in your not-to-distant past and still qualify for a loan, says John Lucas, vice president and manager of ARCS Van Nuys branch.
And the big secondary market leaders--the Federal Home Loan Mortgage Corp. and the Federal National Mortgage Assn.--say they’re stressing “flexibility” in their ordinary lending guidelines for anyone whose credit woes were spurred by the economy rather than poor credit management. These federally chartered firms, which are better known by the monikers Freddie Mac and Fannie Mae, don’t originate loans directly. But they buy millions of loans from banks, thrifts and mortgage bankers. As a result, Fannie and Freddie lending standards become the industry’s lending standards.
“Let’s say you lost your job and, because of the economy, couldn’t find a new one right away. You also couldn’t sell your home, so it went into foreclosure. But three or four years later you have stable income and have re-established yourself,” says John Hemschoot, director of home mortgage standards at Freddie Mac. “You were clearly in a situation that was beyond your control. We would still consider you to be an A credit.”
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The catch to all this is that loan rates and fees for “substandard” mortgages are still substantially higher than on loans made to borrowers with pristine credit. Lenders are also likely to be sticklers about the home’s appraised value, since the risk of foreclosure is relatively higher.
How much more you’d pay varies based on your actual credit problems, though. At Prudential, where the acceptable credit problems are relatively minor, you’d pay about one-half to two percentage points more for a loan than a perfect credit risk. At ARCS, where truly bad risks can apply, the risk “premium” is three percentage points or more. In other words, where a good risk would pay 5%, a bad risk would pay anywhere from 8% to 12% on an adjustable mortgage, depending on your credit record.
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Still, that’s better than what was available to credit scarred borrowers in the past, when the only option was often so-called “asset-based” loans that came with double-digit interest rates and fees that could amount to 10% to 15% of the mortgage amount.
It’s worth mentioning that if your problems were strictly recession-related, you may be able to get a loan at standard rates. However, it may take a lot of shopping--and explaining--to do so, says Hemschoot. Why? Standard-term loans are usually sold to Fannie and Freddie. And many lenders still believe they will only accept perfect risks. Hemschoot has orchestrated an education campaign aimed at explaining why that’s not true. But between banks, thrifts and mortgage bankers there are more than 20,000 lenders in America and some have yet to get the message.
