Some of those studying the mortgage crisis have concluded that unscrupulous lenders often put borrowers with fair or good credit into expensive subprime products, jeopardizing their homes and costing them money. Undoubtedly this happened, but probably not for the reasons that you think.
Consider that a mortgage broker, who has access to many lenders and many programs, has to offer a competitive bid or the borrower will probably go somewhere else. So if you were a broker, you wouldn’t quote 13% at 2 points if you could get a borrower 7% and charge the same price. You would find your borrowers the best-priced programs that they qualified for that you had access to. That’s the key; not every broker or lender has access to every kind of program. For example, many lenders don’t offer FHA loans and won’t be in a position to see if you qualify for one. Ditto Freddie Mac and Fannie Mae. Lenders that tend to specialize in subprime or bad credit mortgages often don’t provide any other kind of financing. Sometimes, borrowers make the mistake of assuming that they need bad credit loans when maybe they don’t. They go directly to subprime lenders when perhaps they could start a little higher up the food chain and get a better loan.
So here, in order of rates / costs, are the types of loans that **may** be available to you, assuming that you are not looking for large (jumbo) or exceptionally large (super-jumbo) loan amounts.
* Fannie Mae or Freddie Mac conventional mortgages. These are almost all underwitten electronically, so you can get a decision very quickly most of the time. It makes sense to see if you can squeak out an approval before trying elsewhere. Pricing depends on your risk factors, including property type, the size of your down payment, and your credit score.
* FHA financing. May be underwritten electronically or by hand. FHA guidelines are less strict than traditional conforming mortgages and feature low down payment requirements.
* Expanded Approval (Fannie Mae) and A- (Freddie Mac). These are loans that “just miss” getting approved with conforming guidelines but can still be underwritten. Extra fees make these loans more expensive than prime grade loans but lower-cost than subprime loans.
* Subprime mortgages. These loans can be graded from B to D, depending on your credit and the lender’s criteria. Credit scores below 600 will probably (but not necessarily) land you in this category. However, just because you are subprime doesn’t mean you can’t comparison shop and make choices.
So before committing to financing, check your options at several levels. And keep in mind that a lender who doesn’t have access to a particular product may not know about it or recommend it, even if it’s a better fit for you. So even if you expect to hear “NO,” suck it up and reach higher anyway. You might be pleasantly surprised.
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So how do you find out what programs different lenders offer? Is there a way to find lenders that offer the specific programs you mentioned above: Fannie Mae or Freddie Mac conventional mortgages, FHA financing, Expanded Approval (Fannie Mae) and A- (Freddie Mac), and Subprime mortgages? Or do you just have to ask each lender if they have these programs?
“Sometimes, borrowers make the mistake of assuming that they need bad credit loans when maybe they don’t.”
This is a good point. A lot of borrowers don’t really know their credit score. I didn’t and was pleasantly surprised to see that my credit score was rather high. I guess the key is to know your credit score, be informed, and never go into home buying blindly.
Thanks,
Sean
Very True, Sean. Plus all buyers shouldn’t take the first deal that comes there way as it may not be the best, even if you do have bad credit.
Alan
Monica,
It’s easier than ever to find and compare mortgage programs. According to FHA, their loans are offered by brokers, banks, credit unions, and other institutions. And Fannie / Freddie loans are widely available too. If you want to do the least amount of legwork, complete an online form and have lenders call you. Then ask if they offer these programs and see if you can get approved. There is a form on this site for getting quotes and programs if you have credit issues. Some of these lenders may offer FHA or conforming financing as well and could put you in a program if you qualify.
Would it be fair to say that it is a better idea to go with a lender that offers those programs?
Alan, your best bet is to try several. I like the forms just because I only have to make one or two inquiries and different kinds of lenders will get in touch with me. Then I can quiz them about their offerings. FHA and Fannie Mae don’t provide lists of lenders but they do have a lender search function. If you end up with subprime you can get those right here. I’d cover all bases–Fannie, FHA, and MCP. That way, you can be confident that you get the best grade loan you qualify for and a fair rate too.
You can easily improve your credit score if you are willing to put in the hard work and discipline. For example, before you apply for a new loan, clear the dues of previous loan first.