They Take the Place of Sub-Prime
by James Robert Deal
(I no longer work as a residential loan officer. I only do commercial mortgages. However, I have retained this web page for general informational value.)
Sub-prime loans have mostly dried up as a result of the mortgage readjustment. FHA always was a better alternative for those with a minimal down payment, and now it is the only alternative.
Allan and Brenda had steady income. They had enough money saved up to make a 3.5% down payment and to have $6,000 in reserves after closing. But they had terrible credit, 534 to be exact. (Today FHA requires scores higher than that.) They had lots of collections, mostly medical.
They found a home for $274,000. Four bedrooms, two bathrooms, a two-car garage, and on a half acre of land. There was plenty of room for Allan to build a shop, plenty of room for their two kids to run and play. I pre-qualified them and encouraged them to make an offer.
They asked the seller to pay $8,000 towards their closing costs. The seller was willing to do so provided the sale price were raised to $282,000. It was a deal.
Allan and Brenda had a low score because of their numerous collections but also because they had not built any credit. They had no credit cards, no car loans, no Sears card, no Target card. Remember to obtain bank credit, you must play the credit game.
Fortunately, FHA allowed Allan and Brenda to rely on "alternative credit." I went to work and documented their regular payments on their rent, electric bill, water bill, sewer and garbage bill, rent, cell phone, car insurance.
To qualify for an FHA loan a borrower must have paid all rent payments or all mortgage payments on time for the previous one or two years.
Allan and Brenda had to pay off all their collections. With FHA all collections except for disputed collections must be paid, including medical collections. Judgments must be paid off too. FHA allows collections and judgments to be paid off at closing. If the loan is not going through, there is sometimes little point in paying off old collections. Old collections affect credit score less and less as the years go by, especially if the borrower builds new good credit to balance off the old bad credit.
Borrowers must be able to give a good explanation for their bad credit. The best explanation is that the unpaid bills were the result of unforeseen circumstances that are unlikely to recur. Medical collections are more forgivable than other collections.
Allan and Brenda got an FHA loan at 6.5% interest, amortized over 30 years. They were overjoyed. (Rates are lower now.)
It was once possible to arrange for a down payment assistance program such as Nehemiah to pay the down payment. The seller donated the down payment plus a small fee which Nehemiah would keep. Then Nehemiah would make a gift of the down payment to the borrower. Down payment assistance is now disallowed. Although a seller can pay closing costs for a buyer, a seller cannot pay the buyer's down payment.
However, a relative or a charitable organization such as a union can still donate the down payment.
Call me at 425-774-6611 or 888-999-2022 for further information. Or e-mail me. The fax number is 425-776-8081.
Copyright © 2010 James Robert Deal. All rights reserved.