It’s Worth Cleaning Up Your Credit

In searching for new sources of revenue, the mortgage industry has embraced the so-called sub-prime sector with a vengeance.

But credit-marred consumers who are forced into the B or C world may want to think twice before joining the sub-prime stampede.

With a little time and effort, you may be able to move back up the alphabet to prime A status and save yourself a lot of money in the process.

How much money? That’s difficult to tell. But there are some clues.

An analysis of lenders’ earnings in the first half of 1997 by National Mortgage News, a trade publication, found that although sub-prime lenders make far fewer loans, their earnings often surpass those of their larger conventional counterparts.

“It’s startling” how much money sub-prime lenders make, said Paul Muolo, the publication’s executive editor. “They’re small, but their profit per loan is greater by a wide margin.”

In other words, lenders who make mortgages to B- and C-rated borrowers charge much more than those who work only with top-rated A-type borrowers, whose rates are listed weekly in newspapers.

Exactly how much they charge is also tough to ascertain.

For the most part, sub-prime lenders “are not brave enough” to list their rates with anyone, said Paul Havemann of HSH Associates in Butler, N.J., one of the nation’s largest publishers of mortgage information. “They’re afraid they’ll scare everybody off, and I don’t doubt it.”

Sub-prime lenders won’t talk specifics until they have a would-be borrower in hand, said HSH’s Keith Gumbinger. “Nobody really wants to talk once they get beyond A credit. About the best they’ll do is talk in ranges, but they prefer to quote rates only on an application-by-application basis.”

Generally, though, Gumbinger said you can expect to add about two percentage points to the going A-credit rate for every step you move down the quality ladder.

So if the rate for those without any blemishes on their records is, say, 7%, B-rated borrowers can expect to pay up to 9% and C-rated borrowers can expect to pay as much as 11%. After that, Gumbinger said, “it’s a wild and woolly sort of world.”

Fees are also higher for borrowers whose credit histories aren’t up to snuff.

At an industry meeting this summer, Ray McKewon of Accredited Home Lenders in San Diego said that on average, B and C borrowers pay 4 points (a point is 1% of the loan amount) plus $650 in fees to obtain a loan, compared to the 1.5 points and $275 in fees typically paid by A borrowers.

But there is an alternative:

Rather than jump into the market now, you can spend a little time cleaning up your credit. Then, when you’ve reestablished yourself and shown you can handle your bills properly, you can start anew.

“If you continue to pay your current bills on time and rectify problems with the old ones,” said Vaughn Irons of the Consumer Credit Counseling Service of greater Atlanta, “you can get into A-credit range.”

The 24-Month Cure

How long it takes to do that is entirely up to you. Everyone is different. But anyone who keeps his nose clean for 24 months can probably qualify for a lower rate, because most lenders today don’t look beyond the last two years.

But “if you really focus,” said Irons, you can get back into the market in as little as six months.

The way to get started is to contact a nonprofit counseling agency like the Consumer Credit Counseling Service.

CCCS is a member of the National Foundation of Consumer Credit, a federally approved housing counseling agency, and it has at least one office in every major city. There are other free credit counseling organizations, many operated by local community groups and even a few by lenders.

Through its HomeBuyers Club, for example, Norwest Mortgage will work with any potential buyer who needs help removing whatever obstacles stand in the way of homeownership.

Try to stay away from credit agencies who charge for their services. Your success directly affects their income, so they might not have the consumer’s best interest at heart.

And don’t make the mistake of thinking that credit counseling is just for low- and moderate-income people. Anyone is welcome, and everyone can benefit from a little coaching.

“We see people who work part time and collect Social Security all the way to up lottery winners who get $700,000 checks every year,” said Irons, whose Atlanta agency has received national recognition for its housing-counseling efforts.

“Our typical client has good income--the average is about $33,000--but bad credit. For the most part, they work every day and have two incomes.”

The first thing a good credit counselor will do is help you create a budget so you can demonstrate later that you have learned how to manage your finances.

Surprisingly, fewer than one in three people who seek counseling is advised to consolidate debts, a tactic often suggested by for-profit counselors.

Manage Better

But Irons warns that most mortgage lenders “don’t recognize debt restructuring as a positive step. So it’s better to try to show that you have the power within yourself to manage your money better.”

Good counselors won’t tell you to concentrate on one creditor at the expense of another, either. Other than perhaps suggesting that you pay as much as you can on high-interest debts to cut your costs as quickly as possible, they won’t prioritize one bill over another.

“You want all your creditors to receive something every month,” Irons said. “Every creditor deserves some attention during the repayment period. The best way to put yourself in position to become a homeowner is to pay all your bills on time.”

Quality counselors also will review your credit report with you and show you how to read it. Sometimes, that’s all it takes to set yourself right, Irons said. “You’d be surprised how many pieces of information in those reports are questionable. Sometimes they’re just out-and-out wrong.”

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Distributed by United Features.