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].
