My First Subprime Client

It happened quite on accident back in 2002.  When I began my mortgage practice seven years ago, I was pretty much an "A Paper" lender.  Conventional, FHA and VA loans were my bread and butter.  The thought of doing a subprime loan made me shudder.  I knew they were out there, but I was perfectly happy sticking to my 680 and higher credit score clientele and not diving into the subprime pool.

Then one day, a Realtor, Ima Agent, asked me if I would review her brother and sister-in-law’s good faith estimate since she felt the rate and fees were a bit high.  Ima Agent told me that they had challenging credit in the past and were looking to buy "zero down".   What could I say?  I would at the very least talk with them to see if I could help.   I reviewed their good faith estimate and was surprised at the cost of doing the mortgage.   Most of our loans (to this day) are Correspondent and the closing costs are fairly low.   Brokering to a subprime lender often has Broker Fees around $795 in addition to the regular closing costs.  Of course the rates are higher too since the risk to the lender is greater.

Mr. and Mrs. Buyer are a very nice couple who were recently married and wanted to stop paying rent.   She admitted that he had a troubled past with his credit and that they had been working on improving his (and their) finances.   Their mid credit scores at the time were around 610.   Back then, I would not have known where to go for an 80/20  with a credit score below 700…except the other loan originator they had met with previously had the name of the mortgage lender he was brokering to…BINGO!    I called the lender and priced out their loan.   I was able to provide my clients a much better rate so they elected to leave the other loan originator. 

Here is what the basic guidelines were back in 2002:

• 600 minimum mid-credit score
• 100% total loan to value using an 80/20
• 50% Total Debt to Income Ratio
• First mortgage is a fixed for 2 years and amortized for 30. 
• First mortgage has a 2 year prepayment penalty of 6 months interest.
• Second Mortgage is amortized for 30 years and due in 15.
• Reserves (taxes and insurance) were OPTIONAL.
• Funds for closing were not seasoned (no bank statements provided) or sourced.
• Seller can pay up to 6% of closing costs and prepaids (taxes and escrow).   

I reviewed their credit history with them and we developed a plan on which debts they should focus on eliminating.   They had all ready established a budget since they were working on reducing their credit card debt.  I began to feel more comfortable with helping Mr. and Mrs. Buyer with their subprime financing since I could tell they understood the responsibility of having a mortgage and being a home owner.   Ima Agent found Mr. and Mrs. Buyer their next home and we financed it with the subprime lender.    They were extremely happy in their new home they purchased in March of 2002 in Seattle for $239,500.

Shortly before their prepayment penalty was over, Mr. and Mrs. Buyer contacted me to restructure their mortgage.   They were excellent borrowers; they paid their mortgages on time as well as their other obligations and did not over extend themselves with credit.    Mr. and Mrs. Buyer with having a mortgage (which helps improve credit score) their credit scores were now in the low 700s.   I was able to provide them a long term mortgage (30 year fixed) for 5.75% and their home had appreciated to $310,000.   

I’m thankful that I took the subprime plunge.   I’ve since been able to help many home buyers who would not have qualified for an FHA or VA mortgage.   Many first time home buyers lack the 3% down or are better off leaving the 3% down in their savings account as a cushion.   

Since my first subprime loan 5 years ago, the guidelines have gone through dramatic changes.   Soon Subprime lenders were promoting 80/20 programs with interest only payments, stated income and credit scores down to 580…yikes!  With these loose guidelines, lenders are now facing record foreclosures and are now tightening their requirements for a subprime loan.    Every day I’m receiving updates from various stating that the minimum credit score for 80/20 financing is now 620 and stated income is disappearing.

I have just added a new category to Mortgage Porter:  the market toughening up, these home owners really need to minding their credit and budget so they don’t wind up in the deep end with no way out of their subprime mortgage after the rate adjust.