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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