Minor Credit Blemishes Shouldn’t Keep You From Qualifying for a Home Mortgage

Q. My husband and I are 53 years old and have been married for nine years. We have a combined annual income of about $50,000. We want to buy a house, but our credit record is very poor; we have filed for three bankruptcies in the last eight years. Is there any way we could possibly qualify for a home mortgage?

--L.G.S.

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A. Finding a mortgage lender after having filed for three bankruptcies in eight years isn’t going to be easy. In fact, you will probably have to demonstrate a clean credit history for at least five to seven years before any lender will be willing to risk making you a loan the size of a typical home mortgage.

The prognosis, however, isn’t as dire for folks with only minor blemishes on their credit records. In fact, if during the latest recession you fell behind in your mortgage payments, car loan, student loans or credit cards, or if a job loss has resulted in 40% or more of your monthly income going toward paying off your mortgage, you are part of a growing, but little-known, multibillion-dollar mortgage market: the A-minus, B and C homeowners, refinancers and new buyers who no longer qualify for “conforming” (A-quality) loans.

To get a conforming mortgage, you cannot have any credit blotches on your record. But hundreds of thousands of Americans have dropped into the nonconforming credit category since 1990 because widespread recession-related layoffs have caused them to miss a car, home or credit card payment. At the same time, however, the lending industry has come to realize that a significant percentage of these homeowners are still excellent credit risks. And the industry is making moves to accommodate these borrowers by creating a secondary market for A-minus, B and C loans that is funded by the same Wall Street and foreign investors who supply capital for A-quality mortgages.

Nationally, lenders are offering lower-rate credit holders mortgages at rates ranging upward from 8%. For example, adjustable-rate mortgages for A-minus borrowers start in the 8% range, rise to 9.5% for B borrowers and start at 10.5% to 11% for Cs. Depending on the specific credit problems experienced by a borrower, most B and C lenders also limit the maximum loan-to-value ratio to 75% or below ($75,000 loan on a $100,000 house).

How can you find one of these loans? Ask a real estate broker in your area for recommendations, because B and C lenders often advertise directly to the trade, not to the general public. You can also ask any conventional lender who rejects your loan application for recommendations. Credit turndowns are so frequent these days that many mortgage bankers and brokers know exactly where to direct you if you ask.

One last tip: Before applying for a loan, get one or more credit reports on yourself 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 not too expensive. Most credit reports go back about seven years, but the last year’s payment history is what matters most to real estate lenders. Each lender, of course, has its own rules.

How to Learn What Savings Bond Pays

Q. I purchased U.S. Savings Bonds between July 1985 and October 1986, when these bonds were earning a guaranteed 7.5% for the first 10 years. Can you tell me what interest rate these bonds are now earning? When I call the Savings Bond service hotline, all they will say is that the guaranteed rate for bonds is 4%. What I can’t figure out is whether I am getting 4% or if I am getting the prevailing market rate, which I know is higher than 4%. Can you sort this out?

--V.M.

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A. Absent a bond redemption table, you can never know whether you’re getting the guaranteed minimum or the prevailing market rate until you cash in the bonds. Why? Because the rate you are actually paid depends on how long you hold the bonds and whether the weighted average of guaranteed minimum over your holding period exceeds the average prevailing market rate in that same period.

What does this mean? It means that bondholders cannot compare the guaranteed minimum to the prevailing market rate in any given six-month period and say, “Aha, I’m getting 4%.” Or, “I’m getting the market rate.” It’s just not done that way.

(By the way, readers should remember that the guaranteed minimum rate was eliminated for bonds sold after May 1, 1995. Bonds sold before that date continue to earn the guaranteed minimum in effect for those bonds. Bonds purchased after May 1, 1995, earn a variable rate set each six months that is pegged to prevailing rates on other U.S. Treasury securities. The rate is currently 5.16%.)

In your case, you held bonds paying a minimum of 7.5% for 10 years, or 20 six-month periods. Now you have held the bonds for an additional year or two when the guaranteed minimum has been 4%. At any given point in time, the weighted average of those interest rates is your guaranteed minimum rate. The longer you hold the bonds at 4%, the lower your guaranteed minimum becomes, because the 4% is dragging down the 7.5%. Remember, contrary to what you and millions of other bondholders may believe--this columnist included, until she researched your question--you have not earned 10 years of 7.5% interest and one or two years of 4% interest. You have earned 11 or 12 years of closer to 7%!

Again, the bottom line is that taxpayers can’t know with precision what their Savings Bonds are worth at any given point absent some detailed calculations on their own--or their own copy of the Federal Reserve redemption table, a copy of which would seem an indispensable companion to any Savings Bond portfolio. You may obtain a copy by calling the Federal Reserve Bank of Kansas City at (800) 333-2919. This number is valid only for residents of the Central and Western United States. It is staffed from 6 a.m. to 6 p.m. PDT Monday through Friday.

Carla Lazzareschi cannot answer inquiries individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business News, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. Or send e-mail to carla.lazzareschi@latimes.com