Assessing sub-prime borrowersJeff Barrsub-prime loans, candidates, selection process, credit reports The mortgage marketplace continues to change. The conventional refinance boom has been over for a long time, and the old world of sub-prime continues to be an important component of the real estate financing market. This article will briefly examine key issues that may develop when assessing a sub-prime candidate for a loan. Judgments Judgments can take many forms. If they are on title, they will likely be a deterrent in closing a loan. Advise clients to find the appropriate party and jurisdiction and pay off the obligations with documentation. Bankruptcies Lenders have a window of time before certain borrowers may be eligible for a mortgage. Chapter 13 is a reorganization of debt. Chapter 7 is a personal bankruptcy that generally wipes the slate clean. The loan to value is likely determined by the period elapsed and the nature of the filing. The borrower often states that a specific creditor was included in the bankruptcy. The burden is on the applicant, and reestablishment of credit is paramount in successfully securing a loan. Borrowers should seek legal advice if they are unsure of the status and ramifications of their bankruptcy. Additionally, many lenders also require bankruptcy discharge papers. Revolving credit Credit cards can destroy the financial stability of any individual. Having too much credit can lower the score of a borrower. The applicant should find the best rate on credit cards and make the appropriate decisions on what debt to consolidate. This will help to reduce the borrower's monthly obligations. Installment loans Vehicles and equipment are included in this category. Make sure that these balances are properly recorded. For instance, when a car is paid off, the bank or automobile dealer must execute an appropriate release. Nothing can be assumed or removed from the ratios until documentation occurs. Medical obligations Medical bills are often discounted or forgiven by lenders. Be sure to find the policy of the mortgage company. If a customer has paid them off, obtain documentation from the respective lender. Collection agencies can be contacted and will provide information in writing when requested. The age of these obligations will often come into play in determining if they should be paid. Mortgages or rent Verification of timely mortgage payments is imperative in determining the viability of a loan. Many lenders have specific policies on the number of mortgage lates allowed to obtain a loan. Rent verification can occur through the use of canceled checks. Not all mortgage companies will accept rental histories through private individuals. Foreclosures have a window of time before they are "forgiven." Most lenders are very strict on their policies. Student loans The key word is deferment in many cases. Loans often carry large balances. These influence ratios to a great degree. Often times these obligations are sold to different servicing agents. Be careful to make sure the proper balances are reviewed in assessing these responsibilities. If the loan is in suspension, obtain necessary information to exclude it from the ratios. Number of inquiries The number of inquires can influence a score as well as the debt-to-income ratios. Addressing the aforementioned matters can work hand-in-hand in raising the score and positioning the borrower for the best possible deal. The goal is to help the sub-prime borrower become a conforming borrower in the immediate future. Divorce Divorce papers are often required to assess obligations of the borrowers. Check with appropriate parties to find the specific requirements of the lenders in the case of divorce. A divorce decree or other necessary documents denoting the separation of the relationship are likely to be required. Remember, the burden of proof is on the borrower. Credit reports can be modified with the appropriate documentation and determination by the loan applicant. Sub-prime lending requires additional attention to detail and patience in reviewing the applicant's credit standing. This is often a more complicated process than conforming deals. The loan officer has a dual responsibility to consult and advise the borrower for their long-term financial success. Positioning a sub-prime applicant for a better credit standing will enable them to reap other benefits when obtaining car insurance, credit cards, equity lines and commercial loans. Jeff Barr is an adjunct professor of communications at the University of Louisville, a speaker and a loan officer. He has moderated numerous political debates as well as hosted a television show. He can be reached at (502) 777-9555 or e-mail [email protected].