A lot has changed in the lending industry since the beginning of the year.
Lenders are going bankrupt, Wall Street and the Secondary Market have stopped purchasing "high risk" loans (High LTV-Stated and No Doc, High LTV-Low FICO, and High LTV-NOO lending niches are considered “high risk”) and good loan programs for people with bad credit are being eliminated or revised. All this converging together is making it harder for those with bad credit to get a mortgage or get a mortgage with a good interest rate.
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Find out what happened, who's left and what your options are.
What Happened?
Seventy-Seven (That’s right---77) bad credit mortgage lenders have closed their doors for good since the beginning of the year---here are some of the notables:
- Southstar Funding (RIP 4-02-2007): Over 5.5 billion dollars in loans originated in 2005, employing over 700 employees, lending in more then 30 states and voted the “best company to work for” by Atlanta Business Chronicle in 2004.
- MLN (RIP 12-29-2006) One of the first to close their doors and one of the top 3 bad credit mortgage lenders in the country.
- Fremont (RIP 3-2-2007): One of the top ten bad credit mortgage lenders in the country.
Why Did This Happen?
A number of factors brought about the bad credit mortgage lender meltdown---issues like increasing interest rates, high national foreclosure rate, loan buybacks, defaults on warehouse line commitments and Wall Street & Secondary Market’s declining appetite for these types of “high risk loans”.
Who’s Left?
Not many…
Those that are still offering bad credit mortgages have realigned their positions with risk and the remaining bad credit mortgage loans being offered today are harder to qualify for then they were 6-7 months ago.
Here are few of the remaining bad credit mortgage lenders still offering bad credit mortgage loans (please note that some or all of the lenders may or may not have retail operations---loans can only be arranged through affiliated loan professionals):
- Bankers Express (www.bankersexpress.com [http://www.bankersexpress.com])
- Eastern Savings Bank (www.easternsavingsbank.com)
- Flexpoint Funding (www.fpfloans.com [http://www.fpfloans.com/])
What Can You Expect?
If you haven’t shopped for a mortgage in the last 6-7 months, be prepared to be shocked and awed---these are just some of the changes in the bad credit mortgage lending industry today:
- Expect to get a lower LTV (loan to value) allowance: Gone are the days that you have a lot of options if your FICO score is below 600 (unless you have a sizeable down payment).
- Expect tougher guidelines for first time home buyers: FTHBs have been identified as a high risk lending group---gone are the days that you have a lot of loan options if you are a first time home buyer.
- Expect to put down a bigger down payment: If the bank is going to reduce its LTV allowance---conversely, borrowers will be expected to bring larger down payments to the closing table.
- Expect to wait longer to qualify if you have a bad credit history: A lot of bad credit mortgage lenders are changing their guidelines on when/what/how they will lend to people that have recently gone through foreclosure, bankruptcy, repossessions & judgments/collections.
- Expect hard times if your FICO score is below 500: Unlike 6-7 months ago, the only programs available to sub-500 borrowers are hard money lenders.
What Type Of Loan Will I Get?
Assuming that you do qualify for the “typical” bad credit mortgage that is being offered today, this is what you can expect:
- A 1st mortgage with a high interest rate. Depending on various circumstances, your rates could be anywhere from 8-12%.
- A 2nd mortgage with even a higher interest rate. If you are trying to get a loan for anything above 80% (and don’t want to pay PMI to get a higher LTV loan), you will need to get a 2nd mortgage with interest rate in the double digits.
- An adjusting payment. Most bad credit mortgage loans offer payments that are fixed for the first 2 or 3 years only---once you have past this teaser time period, your mortgage payment changes (and most often for the worst---higher).
- Once you get the loan, you can’t get out of it. In order to make this loan programs more attractive, a lot of lenders attach a PPP (prepayment penalty) to the loan making it near impossible for a borrower to get out of it once they agree to it (unless they want to pay the 4-5 figure penalty to get out of the loan).
What’s The Best Bad Credit Mortgage Loan Available Today?
Despite the bleak overtone of this article, there are still a handful of good loans for people with bad credit---loans that allow for:
- Up to 97% financing- Lending decisions not based upon credit score (even people with no credit score can qualify for this type of bad credit loan)
- Up to 6% in seller concessions to be contributed to the buyer’s closing costs and prepaid expenses.
- A non-owner occupied co-borrower with a better credit score/history to assist you with qualification.
- Gift funds, gifts of equity and down payment assistance grants to be used in place of down payment.
- First time home buyers allowed.
- A loan with no prepayment agreement or penalty (so that you can refinance as soon as your FICO scores improve).
- A loan that offers a fixed interest rate for 30 years (no more changing payments or higher interest rates).
If you have a bad credit score and want a mortgage, it's more important then ever to do your homework (and beware of the 2 and 3 year ARM bandits).
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