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Lenders Making the Crisis Worse?

Published
by
Gina Pogol
on October 30, 2009
in Mortgage Refinance
. 1 Comment

If you have bad credit, just hope you don’t live in California, Florida, Arizona, Michigan,  or Nevada. Major lenders are piling on the poor people who own homes in these states, requiring higher credit scores and charging more to lend in these designated “distressed” areas. On Monday, one of the largest American banks is joining in the beatdown of distressed states.  Continue reading ‘Lenders Making the Crisis Worse?’

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Sub-prime or Bad Credit Mortgages Have New Consumer Protection Rules

Published
by
Gina Pogol
on October 27, 2009
in Mortgage Refinance
. 0 Comments

On October 1st,   new rules for sub-prime mortgages and bad credit home loans finally took effect–only about fifteen years overdue, but better late than never, right? Continue reading ‘Sub-prime or Bad Credit Mortgages Have New Consumer Protection Rules’

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Today’s Mortgage Insurance: Even if You’re Approved, You’re Not

Published
by
Gina Pogol
on August 21, 2009
in New Home Loan
. 2 Comments

While news that lender underwriting guidelines have toughened up is old stuff, and most people now know that unless they are candidates for financial sainthood they will be dinged with surcharges for everything from missing credit score cutoffs to buying a condo to obtaining subordinate financing (a second mortgage to increase your down payment).  And most people know now that loans are largely underwritten by computer programs. What you probably don’t know is that an automated approval from Fannie Mae or Freddie Mac may not be worth the paper it’s printed on. Continue reading ‘Today’s Mortgage Insurance: Even if You’re Approved, You’re Not’

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Do You Need a Bad Credit or Subprime Mortgage?

Published
by
Gina Pogol
on August 12, 2008
in Mortgage Refinance
. 8 Comments

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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Understanding Prepayment Penalties

Published
by
Gina Pogol
on May 23, 2008
in New Home Loan
. 5 Comments

One thing you read about in connection with subprime and other loans is to beware of prepayment penalties. Maybe it’s the word ‘penalty’ that makes this feature seem sinister. However, lenders don’t expect something for nothing — by agreeing to refrain from retiring your mortgage for a certain number of years you make lending to you a safer investment for the lender — and there can be substantial rewards involved.

For example, you may be offered a lower rate. Or a discount on the loan fees. To determine if accepting a prepayment penalty is a smart move, consider the following:

1. The type of penalty. Prepayment penalties come in two forms, “hard” or “soft.” “Hard” prepays are assessed whenever the loan is paid off before the penalty period expires — this means if the property is sold, if you refinance, or sometimes even if you make a substantial principal reduction (lump sum payment), often anything exceeding twenty percent of the original balance. “Soft” prepayment penalties come into play only in the event of a refinance or substantial repayment — if you sell the home you don’t have to pay it. So if you think you might sell within the penalty period you wouldn’t want to have a hard prepayment penalty but a soft one would be okay.

2. The terms of your loan. Many subprime loans involve a period in which the rate is fixed, then the mortgage converts to an adjustable rate mortgage. Bad credit ARM terms might not be favorable so you should avoid a prepayment penalty period that exceed the fixed rate part of the loan. For example, if the rate is fixed for the first two years of the mortgage, don’t take on a 3-year prepayment penalty.

3. The size of the reward. If taking on a prepayment penalty gets you a lower rate, a mortgage calculator can show you the difference in monthly payment and how much you would save during the time you expect to keep your mortgage. If the lender offers you a few hundred dollars in exchange for a 5 year prepayment penalty it’s probably not enough.

Like most mortgage loan products and features, prepayment penalties are not inherently good or evil. They can save you money when taken at the right time and for the right reasons.

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Time Is Money and Information Is Power– Use Yours Wisely

Published
by
Gina Pogol
on May 20, 2008
in Mortgage Refinance
. 10 Comments

What’s the Truth about Bad Credit Mortgage Lending?

Here’s a taste of what elected officials and the media are saying in the wake of the mortgage crisis, which first became apparent when sub-prime loans began to go bad: “Sub-prime or bad credit mortgages are evil!” “Borrowers were unable to understand (read: too stupid to figure out) what they were signing.” “Home buyers were given attractive rates and then after 2 or 3 years the horrible lenders pulled the rug out from under them.” “This must be stopped!”

Consider the Purpose of a Bad Credit Mortgage

Okay, so what are our leaders really saying? That it was BAD for lenders to give a decent starting interest rate to borrowers with credit blemishes? Think about it. Borrowers had two to three YEARS to clean up their credit and refinance before their rates increased. And if they didn’t do it with that much time (you can get an FHA loan 2 years after a bankruptcy or 3 years after a foreclosure if you can show that you’ve cleaned up your act) then it seems a bit unfair to blame the lender who did after all give these buyers a chance. Subprime loans aren’t meant to be a way of life; they are supposed to be a way to rebuild credit and get a home while doing it. By taking these loans away, our legislators make it harder for those who are motivated to turn their credit history around and make a housing investment to do so. And most of the people with those loans did successfully pay them — why hurt those who are after all in the majority?

It’s also unfair to the rest of sub-prime, bad credit, or Alt-A borrowers to say that the government has to protect them from themselves. Kind of insulting, like if you had a financial setback it must mean that you’re stupid, greedy, or lazy. But now the government wants to add even more pages to your loan packages. Not a problem except that it increases paperwork and expense in an already burdensome process.

Make a Sub-prime or Bad Credit Mortgage Work for You

You probably don’t need your hand held while getting a sub-prime mortgage. However, by following these guidelines you may be able to take advantage of a great real estate investment while prices are lower:

1. Work with a federally regulated lender. One big problem associated with bad credit mortgages is that about half of the lenders aren’t subject to federal regulation or scrutiny. A reputable lender is your first defense against being ripped off.

2. Shop for your mortgage and read your documents thoroughly. Make sure that if you have a prepayment penalty it isn’t longer than the fixed rate period of your loan — you don’t want to be stuck with a high rate when your loan begins adjusting. By checking with several lenders you can be more certain of getting a fair deal because subprime loans are underwritten and priced differently from traditional mortgages. It pays to have a number of lenders look at your application and see what they can come up with.

3. Use your time wisely. If you have two years to clean up your credit before a rate increase make sure you start immediately. Pay your bills on time, close any open collections, and take care of judgments or tax liens. If you don’t have the discipline and the means to get this done then home ownership is probably not a good idea for you yet.

4. Try FHA first. If you are borderline-bad you might be able to squeak into an FHA program. Even if you can’t, get the guidelines for approval so you know what you will have to do to be approved when you are able to refinance out of your bad credit home loan.

5. Ask for advice. That’s what this blog is for — we’re here to help you with your bad credit mortgage questions.

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