Where credit-challenged
borrowers can go for a mortgage loan - without the painful interest rates
After the subprime mortgage
market collapsed, many products that were widely available have disappeared from
the scene.
More than a score of
subprime lending specialists have closed their doors. And many banks like
Washington Mutual and Wells Fargo have cut back on or eliminated subprimes,
leaving many credit-damaged home buyers scrambling to find a loan.
But now that the collapse has shaken out some of the sketchier players, some
familiar and more reliable alternatives to subprime are making a comeback -- but
they do require some work.
Community
development
A little-know loan product
is the "census tract" or Community Reinvestment Act (CRA) loan.
According to Steven Habetz, a mortgage broker with Threshold Finance in
Connecticut , the CRA requires banks starting business in a new area to help meet the credit
needs of the entire community. That translates into loans to low and moderate
income borrowers.
And with the current boom in
retail banking expansion, there's a lot of liquidity looking for low income
borrowers.
"Things have gotten
very competitive," said Habetz," and many banks are looking to make
these loans. They may subsidize them by a half percentage point or more and a
large portion of most urban areas are eligible for them."
The loans can boast low
interest. Habetz said, "We can do a 30-year fixed at 5.75 percent right now
for a couple of points." (Points are fees paid up-front to lower the
interest rate for the entire term of the loan.)
Borrowers with credit scores
of 600 can qualify for these loans. And you don't necessarily have to buy in a
low-income area to be eligible.
"If your income is 80
percent or less of the median for a county, you can qualify, wherever the house
is located," said Habetz.
Even if your income is too
high to ordinarily qualify, but the house you're buying is in the low-income
census tract, you can get a loan. Habetz pointed out that in many of
Connecticut
's small cities, such as
Bridgeport , the entire town is defined as a low-income tract.
To see if the house you're
interested in buying is in one of these areas, go to the Federal Financial
Institutions Examination Council and click on "Geocoding/Mapping
System." Type in the property's address and hit search.
On the resulting page, hit
"Get Census Demographic." The page that appears will have a box
identifying the tract income level. If the income level is low or moderate, the
property is eligible for the loan.
Federal
Housing Administration
According to Jerry Brown, a
public affairs officer with the FHA, the administration wants to make it easier
for low and middle income, credit damaged and first-time home buyers to get a
foot in the door.
FHA loans originated during
the Great Depression when foreclosure waves put hundreds of thousands of people
onto the streets. They're offered by private lenders but insured by the
government, reducing risk, so lenders are willing to make them at favorable
terms.
FHA loans used to be more
popular, but they were eclipsed by easier-to-obtain subprime products. Their
market share fell from 18 percent of all home loans in 1990 to less than 4
percent by 2006, according to the National Association of Home Builders.
One reason is that the
application process for an FHA loan is more tedious and requires more paperwork
than that of subprime loans touted during the housing boom.
Today, there's a new push
toward FHA. Assistant Secretary for Housing, Brian Montgomery, testified before
a congressional committee in favor of modernizing the process for the benefit of
"troubled subprime borrowers."
Requested changes include:
Eliminating a 3 percent down requirement, which would enable more low income
borrowers to qualify; increasing the maximum loan to reflect the increase in
home prices brought by the housing boom; assigning rates by risk to enable
borrowers with higher credit scores to receive lower interest rates.
The first step a prospective
home buyer hoping for an FHA loan should take is to contact several lenders.
It's important to comparison shop because the lenders offer different terms and
rates, just as in conventional loans.
FHA loans with low interest
rates can be approved with low down payments. Adjustable rate mortgages (ARMs),
which can help buyers to get through the first, and often most difficult, year
of ownership, are also available.
The FHA ARMs reset yearly at
no more than 1 percent higher than the original rate, and can rise no more than
5 percent above the original rate, keeping them affordable for borrowers.
Another advantage to FHA
loans, according to Brown, is the credit counseling that comes with, which the
agency recommends. They also require lenders to help borrowers in trouble
instead of simply foreclosing on their homes.
FHA's mortgage programs
typically have no maximum income limits for qualifying; many high-income
borrowers have FHA loans. But, as Brown pointed out, FHA loans target low and
moderate income borrowers and offer little advantage over prime rate loans. Few
high-credit-score borrowers choose to go through the more complicated process of
obtaining them.
Newsletter information
courtesy of Les Christie, CNNMoney.com The
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