Dalrymple: Are there other options in getting a loan?
May 3, 2016
I hear that mortgage underwriting guidelines are fairly strict today. What if a borrower doesn't qualify? Are there other options in getting a loan
First, the guidelines themselves aren't much tougher than they were, say, in 1990. But they are narrower, meaning that lenders have less flexibility in accommodating non-conforming borrowers. And, of course, it depends on the reason that the prospective borrower doesn't qualify.
In the past three years or so, lenders calling themselves "Non-prime", or "Outside Dodd-Frank" (the law that reorganized lending and banking after the Great Meltdown} have appeared. These aren't banks, but private entities; bank regulators wouldn't permit their charges to step that far away from the new regulatory environment, although banks could broker loans to these companies. These lenders ultimately package their products into private mortgage backed securities, and the interest rates are high, often ranging from 6.25 percent to 9.25 percent. (Currently, loans that qualify for purchase by Fannie Mae are under 4 percent)
Credit guidelines are more lenient: with a conservative loan to value ratio, not more than 65 percent, they'll accept credit scores as low as 500. With the low LTVR, a borrower need only to have settled a bankruptcy, as opposed to waiting for three years or so to qualify for a conforming loan. A short sale occurs when a borrower sells the home for less than is owed on it, a very common occurrence during the Financial Crisis. A borrower seeking a new mortgage with the action appearing on a credit report couldn't immediately qualify for a standard mortgage, but some of the "Non-prime" sources advertise "one day out of short sale".
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There are programs for self employed borrowers that ignore financial statements or tax returns, and qualify applicants simply on six months worth of bank statements, using only deposits to analyze income, and not taking into account withdrawals. In other instances, investors seeking to buy single family homes and condominiums as rentals need only to demonstrate that the income from the property being purchased will cover the mortgage payment and other ownership costs. No other financial or income information is required.
The companies that are engaging in this business are walking a fine line, especially on the regulatory side. The CFPB (Consumer Financial Protection Bureau) is watching their activities closely. Also, they depend on investors to buy their MBS (Mortgage Backed Securities) and high delinquencies and foreclosures will quickly scare the buyers of this paper out of the market. There's risk in making the loans to those buying investment properties, beyond that of a downturn in the rental market. Consumer protection laws don't apply to commercial real estate loans of any kind. But, what if a borrower says that he or she is buying, say, a condo for investment, but actually intends to live in it, because of the inability to qualify for a standard primary home loan? It's happening, for sure.
If that loan goes into foreclosure, the borrower can, and probably would, point out that all of the post Meltdown laws and regulations for making a consumer related loan were abrogated, and seek to set aside the foreclosure, not to mention triggering civil and possible criminal action against the lender.
One of the oldest clichés in the lending business, and a true one, involves the borrower who successfully sued a bank for making him a loan because the bank should have known he couldn't pay it back.
Pat Dalrymple is a former bank president who has been making mortgage loans in western Colorado since 1967. He's currently an advisor to Grand Mountain Bank's Mortgage Lending Outreach Initiative. He welcomes your questions on lending and banking, and can be reached at firstname.lastname@example.org.