White Knight Loans for Hard Luck Borrowers
By Steve Marantz
If you are seeking a home loan, but have a recent history of bad credit,or have an uneven employment record, or your business has fallen on hardtimes, you may find it impossible to borrow through standard programs.
There is a solution, however, if you are willing to pay an interest rate2 to 4 points above market. You may be able to obtain a "non-conforming"mortgage, also known as 'A minus', 'B', 'C', and 'D' paper. Such loans aremade with relaxed underwriting criteria that allow for problems or unusualcircumstances which do not necessarily reflect your ability to make payments.
Several area lenders make non-conforming loans, among them AssuranceMortgage of Massachusetts and Connecticut. Assurance's non-conforming programshandle problems such as slow credit, mortgage "lates", un-verifiableincome, high debt ratios, substandard zoning, foreclosures, charge-offs,and bankruptcies.
"A lot of times we're perceived by borrowers as coming in on a whitehorse," says Jerami A. Marshal, Assurance Senior V.P., Non-conformingloan division.
Following are two examples of non-conforming loans made by Assurancein 1994:
A couple seeking a $104,000 loan to purchase their second home was rejectedfor a conventional mortgage, despite having a 10 percent down payment. Thecouple already had signed a Purchase and Sales Agreement on the sale oftheir first home when it was rejected.
The rejection caught the couple off guard. The man, employed in high-tech,had been laid off in 1993, causing a couple of late mortgage payments. Sincethat time, the couple had sold their first house and the man had found anew job at less pay. They were denied a conventional mortgage because ofthe late mortgage payments, and because their debt/income ratio would havebeen 41 percent (standard is 38 percent).
Assurance made the non-conforming 30-year fixed loan at 10 3/4 percent,at a time the market rate was 9 percent. The monthly payment was $135 higherthan it would have been in a conventional loan, and the housing/debt ratiowas 45 percent.
"The borrower was ecstatic," says Marshal. "He had alreadyaccepted a Purchase and Sales Agreement on his first house but he didn'tmake it contingent on getting financing. So he avoided litigation on thatdeal. They were like a lot of people. They didn't realize they would havea problem until it was almost too late."
A man's $250,000 house was in foreclosure as a result of falling farbehind on mortgage payments to a private lender on a loan obtained at anexorbitant 18 percent interest rate. His payment problems were caused bythe decline of his construction business, and the pressing needs of feedinghis large family. However, the man had sizeable equity in the house. Basedon the equity, Assurance approved a $175,000 loan, a six-month adjustableat 11 1/4 percent, for which the rate may rise 1 percent every six months,with a capped increase of 6 percent. The approval came through two weeksbefore the house was scheduled to go into foreclosure.
"We could make the loan because we understood that he had fallenonto hard times, but that it was an isolated case," says Marshal. "Ideally,he gets his company back up and running, and within 24 months he could gofor a refinance if he has a perfect mortgage history."
"It is a misconception that closing costs are higher for non-conformingloans," Marshal says. "In most cases closing costs are the same.But non-conforming loans cannot exceed 90 percent of the value of the property(conventional loans go as high as 97 percent of value of the property).A borrower must have a minimum of ten percent down payment. Five percentof the down payment must be the borrowers own funds, and five percent maycome from a gift."
"History shows that most borrowers of non-conforming loans are ableto refinance into a conventional loan within three years," Marshalsays.
"Non-conforming loans are a means for the borrower to facilitatetheir loan transaction now, when other avenues are exhausted," saysMarshal. "Lenders take a realistic look at the borrower's ability torepay the loan and evaluate the borrower's credit, assets and property usinga common sense approach in risk analysis."
One of Assurance's most memorable non-conforming loans was for the purchaseof a horse farm in Hamilton, recalls, Steven Edelstein, Assurance ManagingPartner.
"The borrower was a foreign national and had been in the countryfor seven years but had no money history," says Edelstein. "Nobank would do it. We did it, and we haven't had any problems. At Assurance,we try and give everyone a chance."