How Low Can You Go…Depends on Your Down Payment

Here are some credit score/loan-to-value figures I just received from a subprime lender for "full doc" mortgages:

  • 90% – 580 Mid Score
  • 85% – 540 Mid Score
  • 80% – 520 Mid Score

The rates were not provided but I can assure they would not be attractive.  We’re probably talking double digits for a 3 year balloon with a prepayment penalty.   I strongly recommend using FHA over this type of financing.  (FHA is not credit score driven; you do need to have a good credit history over the past year). 

If you cannot qualify for FHA, then I encourage you to work with a Mortgage Professional to develop a plan to get on track for buying a home or refinancing.

Ashamed of having a subprime mortgage? Don’t be.


The other day, FOX news contacted me after reading one of my post wanting to interview some of my successful borrowers who once had a subprime mortgage.  You wouldn’t know this from watching the news: a majority of subprime mortgages are performing well.   It’s a minority that are not.   

I was eager to help tell this story and sent an email out to a handful of my clients who once had subprime mortgages letting them know about this opportunity.   No one responded.   It made me wonder if they are embarrassed they once used "subprime financing"?   With how it’s getting a big black eye, I guess I could understand how they feel.    It’s too bad that more of the "good news" about this type of financing is not making the headlines.

The fact is, most of my clients who had subprime/alt-a mortgages are doing very well.   They did what you’re suppose to do if you have a subprime mortgage:

  1. Work on improving what ever situation caused them not to have a "prime" mortgage (employment, credit, assets, etc.).
  2. Prepared themselves for when their fixed period and prepayment penalty is over so they can refinance into a "prime" mortgage.  They had an "exit strategy".

Here are a few examples:

Single mom who’s self employed for one year but coming from the same line of work for five years with excellent credit.   She had a track record of solid income however, conforming guidelines require two years of tax returns (for full doc) or two years of business licenses (stated/NIV).   We provided a 30 year fixed mortgage using 6 months bank statements to document her income.   She recently sold that home and is now in her next home which we were able to go "conforming" using the proceeds from her first home for the down payment.

Wife marries a "project" husband (her loving terms, not mine) where his past credit is a mess.  Her credit is fine but he’s the primary wage earner.   They were actually my first subprime loans.   At that time, if you had a mid credit score of 600 or better, you could do zero down.   They barely squeaked in.  However, they did what subprime buyers are suppose to do:  they worked on cleaning up their credit over the two year time of their mortgage had a fixed rate.  They changed their spending habits and were responsible home owners.    They since refinanced after their two year prepayment penalty was up.    Having a mortgage has improved their credit score (as well as working on their credit) and they have benefited from the appreciation that the Pacific Northwest has offered them.

Young couple with three children living with the in-laws.  Money was a little tight as far as the down payment was concerned.  They had decent income and credit that was not quite established yet.   They believed in not having credit cards.   They were able to purchase their first home and move out of the folks house (a good move for everyone, I’m sure!) and later refinanced with higher credit scores and equity they gained by the time their purchase money mortgage was about to adjust.

Home buyers who used subprime mortgages to purchase their home, who had good advice from a qualified Mortgage Professional and who followed that advice, should not be ashamed to be associated with a subprime or alt-a mortgage loan.   They did what you’re suppose to do, use it as band-aid financing.

Home owners who have a subprime mortgage and did not change their habits are probably going to be hurt in this market.   If you currently have a subprime mortgage with an ARM or prepayment penalty adjusting within the next 18 months, please contact your Mortgage Professional as soon as possible so you can start working on your credit.

If you’re part of the first group, be proud!  You improved your credit, manage your debts and spending patterns and became a responsible home owner.   

There’s No Love for the Subprime Borrower

I hope you’ll enjoy reading an earlier post of mine that I featured at Rain City Guide.  This article was originally written by me on February 13, 2007.   Recently FOX News contacted me about it wanting to speak with some of my successful clients who were once considered "subprime".   It’s too bad I had a real short notice and could not help them out.   The "successful subprime" borrowers outweigh the others by far.  Without further ado…

There’s No Love for the Subprime BorrowerMpj039612900001

It’s all over the news, we’re hearing about major subprime lenders having to restate their losses and every day, lenders are coming into my office to inform us of changes to their guidelines.   This is all good, right?    It will be tougher to provide loans for home buyers who maybe should be spending more time to learn about budgeting and using their credit cards.    What about the people who are all ready in these programs?

First, allow me to explain the basic dynamics of these loans.  Many of these mortgages are zero down, 80/20s (80% of the loan to value for the first mortgage/20% of the value for the second mortgage).   The first mortgage is typically offers a fixed rate for 2-3 years with a prepayment penalty (the standard is six months interest) that matches the fixed rate period.   In addition, the mortgages may be interest only or amortized at 30, 40 or 50 years.    The rates on these mortgages are completely dependent on credit score.

When I meet with Mr. and Mrs. Subprime, I advise them of their options of buying now using this type of subprime mortgage or that they can work on their credit, job history, etc. and buy later with a better mortgage program.   Because there are no guarantee of what rates will be (or maybe because they know there’s not guaranteed they’ll clean up their act) and because they want to buy a house now, they often opt for the subprime mortgage.   Once this happens, I heavily stress (or Jillayne would say, I lecture :) —which I’m sure I do) to Mr. and Mrs. Subprime that they have 2-3 years to change their spending habits because once their fixed period rate is over, their mortgage is going to adjust and do so big time.    I let them know that I want them to be in the best position for a refinance into permanent financing (or to have a better mortgage should they decide to sell the home assuming they have any equity) and that the subprime mortgage they are using to obtain their home is temporary financing. 

Many of my clients in these mortgages have done very well and I’m proud of them.   They have taken the responsibility of owning a home and having a mortgage to heart.  I’m able to restructure the original mortgage and improve their situation greatly.   The concern is for Mr. and Mrs. Subprime who just didn’t get the hang of it.   They continued to charge up their credit cards, they bought or leased a new car to go in their new driveway and maybe a new TV, too.   They’ve been sliding ever since the holidays and are now having a tough time paying their mortgages on time.   Maybe they just have one mortgage late.   Their credit is rough at best.   Their fixed period (and prepayment penalty) is over and now they really need to refinance fast because their mortgage has adjusted for the first time—their rate is now 2% higher.  Their situation has gone from bad to worse.    With all the tightening in the subprime market, even if their credit scores and scenarios are the same as when they bought, there may not be a program for them to refinance out of now.   They will be forced to sell (hopefully they have enough equity to pay commissions and other closing costs) or to somehow manage to choke down their increased payments.

I guess this post is a plea of sorts.  If you currently have a subprime loan (especially the type I described) please contact your Mortgage Planner to have your credit reviewed to make sure you’re on the right track to be able to refinance (or have a better loan for when you sell) when the time is due.   Do not assume there will be a program for you if you have not made significant changes to your spending and use of credit cards.   If you’re a real estate agent or loan originator, check in on your subprime clients to let them know of the changes in the industry…see if they need guidance to stay or get on track so they don’t wind up stuck with a higher mortgage payment, being forced to sell or foreclosure.

What’s going on in the mortgage industry? A must see graph spells it out.

This graph from the New York Times paints a picture that I can’t call pretty.   

"So what’s gone wrong in the last few months?  An unfortunate combination:  more loans in default (many borrowers were never in a position to pay them off), risky bets worth billions made by some investors (deals now gone sour), and the reversal of the housing boom."

A big hat tip to Behind The Mortgage.

Debt and Your Mortgage

Istock_000002310753medium_3This is the second part of my series on debt inspired by the blog Dollar Buy Dollar.  Before I get too deep into my posts, I want to stress that if you have a mortgage and you are sliding further into debt, please contact your Mortgage Professional as soon as possible.   Don’t wait.  It may feel better to dig your way out without help, however, credit card lates and even worse, mortgage lates, will ding your credit score down to where either:

  1. Your rate for a possible refinance or equity loan is much higher as rates are credit score based.
  2. You no longer qualify for a mortgage at the loan to value you need for debt relief.   (The amount of equity-loan to value-that is allowed to borrower is also credit score based).

I’m not a huge fan for using one’s equity as a cash card.   However if your equity can bail you out of a desperate debt situation and if you are capable of changing your spending and savings habits so you don’t wind up having to tap your equity again, then it makes sense.   

I cannot emphasize enough how important it is to take action right away.  Especially in our current mortgage "subprime" climate where it is tougher to qualify for loans with lower credit scores.  If your scores plumet too low and if you are not able to access  your equity, you may be forced to sell your home.   A mortgage late is more devistating to your scores than a credit card late and any recent lates will zap your score (mortgage lates carry more weight than a credit card late).    Credit is reflective, so the more time since a late payment, the more your score will rebound.

Recently I helped a couple where the homeowner, who was self employed successfuly for over 20 years ran into hardships with his business.   He wound up relying on credit cards to try to "bridge" his lack of income.   In a short period of time, he was not able to pay his credit cards or keep up with his mortgage.   He has a beautiful home valued around $700,000 and a mortgage balance of $250,000.   He wound up with a 120 day late (3 months of not paying a mortgage–preforeclosure).   His then Fiance helped to get him current on his mortgage, he was lucky!   However the mortgage he had was ugly.   The Fiance contacted me about refinancing their high rate subprime loan he was currently in.  She had credit scores over 700 and his were around 400.   In addition to the "preforeclosure" on his mortgage, his credit report was full of collections and late payments.  Here’s what we had to do in order to help this couple in order for them to receive the best rate and program available:

  1. Wait until the 120 day late was 1 year old.  (We were six months away and were waiting for the underlying mortgage’s prepayment penalty to expire).
  2. They married and she was added to the title.   The lender wanted to wait until she was on the title for 6 months before they would close.
  3. He remained on the title (is still a vested homeowner) and is not on the new mortgage.
  4. His judgments had to be paid at closing.  (This was a cash out refinance to pay off all remaining derogotory debts).

We did a no income verifed loan with just her on the mortgage.   The new rate was just 0.25% over the available conforming rates with no prepay penalties.   Bottom line, he was fortunate that when he disclosed his situation to his partner, she was willing to stick around and help bail him out.   He’s also lucky that he owned a home and had enough equity that he could do the cash refinance or, if he had to, sell the home and have enough proceeds to pay off debt and have a savings left over.

If he didn’t have the mortgage lates, we could have refinanced his loan much sooner.     It all worked out for the couple…now newlyweds!   Restructuring the mortgage to eliminate the debts has made a dramatic difference in their lives.   Your Mortgage Professional may or may not be able to help "bail you out".   At the very least, a qualified Mortgage Professional can help you decide which debts to pay first.   I’ll address that issue in my next post for this series.

Watch CNN’s video on Dollar Buy Dollar and couples who hide debt from each other.

Related Post: The Debt Disease…Dollar Buy Dollar; Borrower Beware

Borrower Beware

I wasn’t planning this post to be part of my debt series but when I saw the front page of the Seattle Times this morning…the timing is uncanny.   Borrower, beware:  debt disaster looms as rates rise on easy-money.   

This is a tale of a couple who was turned down my many mortgage lenders for zero down financing because they had no savings and $20,000 in credit card debt.  They are a common portrait of a subprime home buyer over the past 2-3 years.

I have issues with both their loan originator AND the subprime borrowers in this report.   

"The couple signed two mortgages to buy their $246,800 house in July. The first loan, a so-called pick-a-payment loan for 80 percent of the deal, had a variable interest rate. The second mortgage, at 12.5 percent interest, covered the rest. The deal included a pre-payment penalty on the first mortgage, and a balloon payment on the second.

Not long after they signed the loan, [the home buyer] decided to dump her sedentary office job to become a personal fitness trainer. The new job paid less, $7.89 an hour, but she had the opportunity to earn commissions as she brought in clients."

There is nothing wrong with an 80/20 subprime mortgage when it’s structured correctly and the clients understand that they have 2-3 years to prepare for refinancing.   This means they need to improve their credit scores (having a mortgage paid on time helps credit scores) and to reduce frivolous spending.   They need to be accountable and take a hard look at themselves and their finances.   Switching from a fixed income, even if it’s a boring job, to a new career that pays commission is irresponsible as a brand new home owner.

The pick a payment program is negative amortization and is not the best program for anyone with 100% financing, let alone a subprime borrower.    In fact, it’s probably the worse program a first time home buyer (subprime or not) could have.    They will 9 times out of 10 opt for the lower (deferred interest) payment and not fully grasp what the consequence are when their mortgage recasts at the higher rate and fully amortized payment.

"I had no idea the interest was going to climb like it is — they didn’t tell us that at all," Fultz insisted. "Maybe I wasn’t listening. Maybe I’m not good at words. Negative amortization? I never even heard of that."

Their Loan Originator’s response to this (you might to sit down and put away any sharp objects before you read this): 

"I agree, it isn’t explaining it in full… But…it’s explained to the client 47,000 freaking times."

And to top it all off, the Loan Originator, who’s business primarily consist of feasting on subprime buyers says she can’t make her mortgage payments now due to the decline in the subprime market.

The pullback has cratered the business model for brokers like Mills. She used to write 10 to 15 loans a month. In March, she wrote two. In February? None.

"I didn’t make my own mortgage payment this month," [the LO] said in April. "But nobody feels sorry for me."

Oh boy…someone pass me a hanky!  This Loan Originator closes 10-15 deals typically a month and I’ll eat a shoe if she’s not making more than 1.5% on each transaction.   And a few tight months SHE’s missing her mortgage payment?   

Please work with a professional Mortgage Planner.   And not the first person who tells you "yes".    That type of LO smells your desire to own a home and will take you to the bank.   And they will not be there for you after closing…unless you want a new mortgage! 

Buyer beware, indeed.

Related post:  The Debt Disease:  Dollar Buy Dollar

News Flash

KOMO-4 just interviewed me at my office regarding subprime loans.   You can watch the interview tonight during their 6:00 p.m. broadcast.   

Update:  Here’s a link to the video.   Don’t blink…you might miss me!

Subprime LTVs and Credit Scores

Yesterday I received an email a subprime lender promoting their new loan to value (LTV) limits based on credit scores.    I thought it was a good reflection of the current LTV/credit score guidelines for this current market.

100% LTV @ 660 Credit Score

95% LTV @ 580 Credit Score

90% LTV @ 560 Credit Score

85% LTV @ 540 Credit Score

80% LTV @ 520 Credit Score

Interest rates were not provided with the email that I received, however, I would be they’re undesirable.   

Someone with a 660 credit score, depending on what their actual credit history and financial portfolio looks likes, should actually be able to obtain other financing besides subprime, such as FHA or a Flex type program

This is a sharp contrast to what was available a few months ago for subprime borrowers.   And I’m amazed at how many phone calls I’m still receiving from people who know they have a credit score in the 500 range wanting zero down who are living paycheck to paycheck.   I don’t blame anyone for wanting to own a home, it is touted as the "American Dream".  But a 2-3 year prepayment penalty with a double-digit mortgage interest rate, is not.