- The Washington Times - Friday, December 22, 2000

When consumer "X" thinks about buying a home these days, it is with a feeling of resignation. With the credit problems she and her husband have struggled to clear up within the last year or two, she thinks they will never qualify for a mortgage.

Consumer "Y" and his wife feel the same way, but for different reasons. They have good credit and plenty of income, but since they have been working for only a few years, pay a high monthly rent for their apartment and already have a baby to support, they have saved very little cash. Thinking they need to save up for a 10 or even 20 percent down payment before they can look for a home, they despair at the prospect of ever owning a house.

For both of these couples, homeownership is not just a dream, but a real possibility. Most banks and mortgage companies in the metro area offer loan programs geared to getting almost everyone into a home.

"People have so many choices today whether they have good credit or bad credit," says Mary Naccash, president of First Professional Mortgage in Annapolis. "Even people who are one day out of bankruptcy can get a mortgage."

"One thing that's frustrating for people with credit problems and that they need to realize is there will be a trade-off when they get a loan," she says. "They will need either a higher down payment or to a pay a higher interest rate, or both."

Brad Carter, regional director for Weichert Financial Services, says his company tries never to send anyone away without a loan or at least the prospect of a loan in the future.

"The main goal for the challenged borrower is try to find them some type of loan for which they can qualify," says Mr. Carter. "First we try an FHA (Federal Housing Administration) loan because those loans have slightly more lenient credit requirements. If that doesn't work we can try for what we call a 'BCD' non-conforming loan."

"If a consumer cannot qualify for that type of loan," he says, "we will give them a written plan which tells them that if they follow certain steps and meet certain criteria, then the borrower could qualify for a loan in six months to a year."

While some banks and mortgage companies specialize in working with consumers with credit problems, all of these companies have more to offer a buyer with good credit.

"Bank of America has a more expansive range of programs for people with good to medium credit," says Kirk Jeffrey, an account executive with Bank of America in Bethesda. "We have the most to offer people who have not had a lot of trouble over the past two years or so keeping up with their payments. It is easier to find a loan program for people with decent credit even if they don't have a lot of savings to work with."

Bank of America offers a conventional loan (which means that the loan amount is for less than $275,000) with up to 100 percent financing, or no down payment. With this loan, the buyer is allowed to negotiate with the seller to pay closing costs of up to 3 percent. This makes it possible for a buyer to get a home with $1,000 or less in cash.

"If a buyer has an annual income of $66,240 or less, this same loan can be tied to a below-market interest rate," says Mr. Jeffrey. "That income level is the required 80 percent or less of the HUD-defined median income for the Washington area, and therefore it qualifies the buyers to pay a half percent lower interest rate than the going rate."

"Generally, though," he says, "a buyer must have pretty good credit to qualify for a 100 percent financing loan."

Weichert Financial Services also offers a 100 percent financing loan with the same allowance for the seller to pay up to 3 percent of the closing costs, again for people with good credit but little cash to invest in a home.

"Besides these 100 percent financing programs, a major benefit for people with good credit is that they can be approved for a loan within minutes, and sometimes are approved for a 'streamlined' loan which means they will need less documentation," says Mr. Carter. "A streamlined loan can be extremely important for someone [who is] self-employed, and their good credit may qualify them for a higher loan amount."

First Professional Mortgage has several loan programs geared to people with good credit, including a 100 percent financing loan similar to others already described.

"We also offer a 107 percent financing program which allows consumers to borrow the entire loan amount plus enough money to pay for the closing costs on the loan," says Miss Naccash. "The amount of money required for the closing costs varies from jurisdiction to jurisdiction, so it could be a 103 percent or up to [a] 107 percent loan. Obviously we won't loan an amount over the costs of the house plus the closing costs, so people won't be able to walk away with cash in this situation."

First Professional Mortgage also offers a new "Teachers' Program," available to many education workers, which features a lower interest rate and 100 percent financing. It also stretches the debt-to-income ratio to allow more people to qualify for a larger loan.

"The standard underwriting guidelines for a loan of 95 percent of the value of a home, with a 5 percent down payment, call for 36 percent of a borrower's income to be spent on all debts, including the housing payments," says Miss Naccash, explaining the debt-to-income ratio. "Under the Teacher's Program and other similar programs, the total debt can be as high as 41 percent of the borrower's income, which allows them to qualify for a larger loan."

Credit scores assigned to borrowers by credit reporting agencies are the major determining factor in qualifying for some types of loans.

"The standard conventional loan requires a credit score of about 620," says Mr. Carter. "But borrowers with scores as low as 560 can still get a loan. Usually consumers with low credit scores can get a 30-year fixed loan or a two-year adjustable rate loan as long as they can make a down payment of 10 percent. If they can do that, then the debt ratio can go as high as 50 percent of their income. These types of loans will carry a little higher interest rate, about 1*-to-2 percent above the regular interest rates."

What makes a difference in whether a consumer can qualify for a mortgage often depends on the circumstances surrounding the credit problems.

"We try to look at every single borrower as an individual," says Mr. Carter. "When people come to us with bad credit we look for the reasons they have had financial difficulties. For instance, if a person has no cash or has credit problems due to a divorce, that is sometimes because a bank will come after both parties in a divorce even when the divorce agreement said only one of them is responsible for the debt. Sometimes a person has been laid off from their job and is still struggling to get back on track with paying their bills on time, or there has been a major illness in the family that caused payments to be slow or left the family with a large amount of debt."

"If these are the reasons for the bad credit rating, as opposed to someone who has just mismanaged their money," he says, "we can work with them to find them a loan. Basically the bank is looking at the risk factors involved when any loan decision is made, and if the financial problems resulted from a one-time catastrophe such as a job loss or medical problem, they are looked upon as less of a risk factor than someone with repeated financial problems."

Consumers with credit problems will usually have to pay a higher interest rate or make a larger down payment to qualify for a mortgage.

"If you want to buy a home you can be as little as one day out of bankruptcy and qualify for a loan, but you will definitely need a higher degree of cash," says Miss Naccash. "There are 100 percent financing programs available for people with a credit score as low as 580, but the penalty for the credit problems is that they will pay an interest rate as high as 11* or 12 percent right now. However, the advantage to doing this is that if a borrower makes payments on time for two years, then he or she should be in a position to refinance to a better interest rate and will have enjoyed the benefits of homeownership during those years."

Generally borrowers who have declared bankruptcy must wait three or four years before they can qualify for a loan, according to Mr. Jeffrey. But in some circumstances, a loan can be given after merely two years.

"It really depends on what precipitated the bankruptcy," says Mr. Jeffrey. "The key would be to be able to define the financial problems as a single occurrence which is highly unlikely to occur again. Right now, loans are available to people with some credit problems at rates of 9 percent or so, while the regular rates are at 7 percent. The down payment requirements usually go up, too."

"The most important thing for anyone to do if they want to buy a house is to go to a lender to be preapproved for a loan," Miss Naccash says. "A lender can help clean up someone's credit but it may take time, so it would be foolish to find the house of your dreams and then have it blow up in your face."

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