Unless you’ve just been rescued from a deserted island, you have heard the news about what’s going on in the subprime mortgage industry. It’s not a pretty site and in fact, it’s getting dicier every day with Alt-A lending (not quite subprime lending…it’s more of the stated income and 80/20 types of loans) tightening up, many people you helped find homes for during the past couple years no longer qualify for a mortgage.
For example, on the afternoon of Friday, March 9th, I received a quote for a client with a mid score of 750 who needed an 80/20 mortgage stated income. I was planning on brokering to Greenpoint Mortgage. That very evening, I received an email stating that Greenpoint Mortgage is no longer doing ANY 80/20 mortgages. Greenpoint Mortgage is NOT a subprime lender. They are more along the lines of "alt-a" (not quite "conforming"). I had to contact the gentleman I had sent an email to hours earlier to tell him that I no longer had a mortgage program for him.
There are worse stories surfacing as well. When New Century Mortgage, one of the nations largest subprime lenders and a poster-child for the subprime mess, could no longer do fundings, many potential home buyers were at the funding stage of their mortgage…with no funds and no mortgage. Yes, it’s possible if you have a subprime buyer, you may get all the way to closing only to have the lender not able to fund the mortgage.
What should you do?
1. Ask your potential home buyer if they have a subprime/alt-a mortgage. Some signs might include:
- 80/20 Financing (what does the preapproval letter say about loan-to-value?)
- Stated income
- Prepayment penalty (you can determine this on the Federal Truth In Lending, your buyer may not know)
2) Ask the Loan Originator if the lender they are working with is subprime or alternative. Even traditional "a paper" lenders, such as Countrywide and Wells Fargo, have subprime divisions.
So what if your buyer is subprime or using alternative (alt-a) type financing?
- You may want to consider closing quickly. Many programs are disappearing quickly (such as 80/20s and stated income). Credit score requirements are being raised and underwriting guidelines are toughening up for these types of loans. Some lenders may honor programs if the loans are locked…some may not have any choice.
- You might have the buyer provide a reduced earnest money. In the event of a worse case scenario, in case they lose the funds if their financing contingency is waived.
How about your clients who have closed using subprime 80/20 mortgages? This could be an excellent time to reach out to them. They may be hearing all of the bad press on the news and could be rightfully concerned.
If your subprime clients have not worked on improving their credit since they obtained their mortgage 2-3 years ago, they could be in for a world of hurt when their mortgage is getting ready to adjust. I strongly encourage you to have them contact their mortgage professional asap to have their credit reviewed to see if they should (1) refi now; (2) work on their credit and wait until their prepayment penalty is up; (3) do nothing…prepare to sale.