Subprime? Why Not?

By
Mortgage and Lending with First Option Mortgage 269761

Sub-prime lending is a much better option than Private or Hard money lending - if you qualify.

For a few years, I stopped doing conventional lending and switched to Hard and Private money lending. Hard money is hard cash. It requires 35% down, demands repayment within 6 to 12 months and rates can be pretty high (as high as 18%)! Private money may require less money down (maybe 20%), repayment may be 30 years and rates are usually around 8-12%. However, Private money is hard to find these days with the government making it harder for private people to lend money on primary residence.  

I was thankful that when i got back into the mortgage business with conventional and government lending, guidelines loosened making it a little easier to qualify for a mortgage. For example, Fannie Mae now allows a person to include rental income using proof of a security deposit and rental agreement instead of needing 2 years tax returns and 25% equity in the home - Yay! FHA will offer a loan with scores down to 560 (with 10% down). However, like with most all companies, there are "tell-me” guidelines and then there are "prove-it" guidelines. 

A "tell-me" guideline provides a LO with information needed to determine if he/she can move forward with the loan request: Debt to income ratios, Minimum credit scores, Property types, Income types.  The "prove-it" guidelines are requested by the underwriter: Show me the income with correct year-to-date information, source deposits larger than 1% of the loan amount, provide child support payments for 3 months, demonstrate ability to pay for emergencies in the home using residual income. 

  

There is no way for a LO to know what an Underwriter will ask for on each file because underwriting is subjective. Some Underwriters are more strict than others. Aside from that, each file ends up with a different lender which has different guidelines. The determination of the lender is not known until the rate is locked and even then, changes can be made at the last minute if the Branch Manager realizes that the lender requirements are too difficult to obtain. If that's the case, the loan is underwritten for a different lender (this is one of the many reasons why a loan delays).

Experience is the only way to learn most of the "prove-it" guidelines.

 

Enter Sub-prime loans. Remember those? Back before 2008, loans were offered to people who couldn't qualify for a standard loan. The issue may have been the credit score, the income (or lack of), employment (or lack of) or any number of reasons that kept the borrower from obtaining a loan. The problem with these loans back then is that there were no restrictions on the compensation to the bank or broker. People who had to use sub-prime lending sometimes endured much higher interest rates (as high as 14.99%), higher closing costs (as much as 8% versus 3% today) and the loan may have included a pre-payment penalty (up to 6 months mortgage payments, for example). These loans were almost always offered using an Adjustable Rate Mortgage (ARM). The ARM interest rate would stay the same for 2 years and then adjust (up or down) every 6 months thereafter. 

 

Times have changed since then. Sub-prime loans are more like Alternative Lending. Although they allow scores down to 500, they require a significant amount of money for down payment (up to 35%). The rates are not as high (usually up to 10%) and they are offered with fix rates and no pre-payment penalties. 

 

Most every lender these days has a sub-prime lender. Programs offered: Bank statement loans, 1 day out of foreclosure, short sale, bankruptcy, or deed in-lieu of foreclosure, Non-warrantable condo's, Up to 50% Debt to Income ratios (versus 43% with conventional lending), Foreign National loans, Up to $2 million loans, no mortgage insurance with 10% down, Scores down to 500. 

Don't think that the loan is easier just because there is less information required or because the "tell-me" guidelines are less strict. It's just the opposite. These lenders tend to be very difficult to close and makes one think twice about using them. The "tell-me" guidelines are general: Bank statement Program for Self Employed Borrowers using 24 months with 20% down! "Prove-it" guidelines: Must show proof of self-employment for 2 years (some people don't have an LLC or use a Schedule C), Must have a 720 credit score (most people with scores that high don't need this program), Source irregular deposits in bank statement and if unable, cannot use as income (What does regular self-employment income look like?).

Sometimes however, you just have to go this route and it's good to have that option.

 

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foreign national
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bad credit
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home buying
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Rainer
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Realty One Group Alliance - San Mateo, CA
Broker Associate & Licensed Architect

Hi Bill,

 

Thanks for sharing this great article.

Sep 29, 2016 08:52 AM #1
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Bill Polack

Bilingual Spanish Loan Officer in Southeast US.
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