Explaining Hard Credit Loans

Explaining Hard Credit Loans

What is the meaning of hard credit? Well, it is simply loans that FNMA will not buy due to current or previous derogatory credit. There is a huge market for these loans since almost everyone has some sort of a bump on their credit report. This is where alternative lending comes in to play and where we can help YOU or someone you know.

Credit is graded between A+ and D (A+, A, A-, B, C, C-, and D). “A+” Credit conforms to FNMA (fannie-mae) guidelines. You receive the best possible terms and interest rates being rated A+. The rest falls into this alternative market and is rated from “A”, (good, but with a few derogatory remarks) and “D”, being the worst. You would be surprised at how many people fit into the Alternative Market today. ONE ding and you are no longer a FNMA candidate. But, does that mean you shouldn’t be considered for a mortgage? Certainly not! That’s why ALLIED MORTGAGE has over 150 different programs that will fit almost any customer who falls out of the FNMA market.

Equity means everything when it comes to lending on Hard Credit. The worse the credit, the more the equity! And, the worse the credit, the HIGHER the interest rates.

Credit falling into the “A” category have NO late Mortgage payments or Consumer credit delinquencies. No Bankruptcy or Foreclosures and No Charge off’s or Collections accounts. The Debt to Income ratios are generally low. These loans have a LOW risk and the lender will loan up to 95% of the home value.

“D” credit is the other extreme. “D” credit can have late mortgage payments exceeding 150 days, a high Debt load, current bankruptcy and the majority of credit is usually derogatory. These loans are very risky and, as mentioned before, the lender will require a large amount of equity to approve the loan. Obviously, these loans will come with a much higher than normal market rate. We can finance a customer with as little as one day out of bankruptcy (call for details).

Alternative Credit will rate your credit by “4” factors; 1. Mortgage History. 2. Consumer Debt Ratio. 3. DTI Ratio. 4. Credit Scores

1. Mortgage (or Rent) History. A BIG factor in credit grading is the Mortgage (or Rent) history. ONE 30 day late could lower your grade to an automatic A-, a 90 day mortgage late will lower your grade to a C. The Mortgage grade is based on a 12 month history.

2. Percentage of Derogatory Consumer Debt as compared to Total Consumer Debt. Consumer credit grading is based on a 24 month history. Any Consumer debt (open or not) that is over 24 months old is normally not counted or included as good or bad. Normally, Collection Accounts, Judgments and Chargeoffs that are over 24 months old OR less than $500 are NOT counted. However, if there is a Judgment with a payment showing on the credit report, that payment MUST be included when calculating the DTI ratio.

3. Debt-to-Income (DTI) Ratio: This is your Mortgage + Debts as compared to your Gross monthly income. The higher this ratio is the LOWER your credit score will be. Example: Your mortgage payment is $1000 and your monthly debts are $500. This equals $1500 in DEBT per month. If your Gross Monthly Income is $5000, then your debt-to-income (DTI) would be 30%. The higher the DTI, the LOWER your credit score. WHY? Because a high debt load is a high risk.

4. Credit Score: The lower your credit score is, the LOWER the Loan-To-Value (LTV)* and the HIGHER your Rate will be. Credit scores are based on how much credit you have, how much of that credit is derogatory, how much your owe in relation to your maximum credit allowed and a number of other factors. Loan to value (LTV) is the Loan amount compared to the Value of the home.

Dan Palumbo, Licensed Mortgage Banker 800-817-8743

Dan is the published author of the Mortgage Loan Officer Training Manual. You may order one by visiting www.mortgagetrainingmanual.com

Licensed Mortgage Banker - New Jersey Department of Banking and Insurance; Licensed by the Pennsylvania Department of Banking; Virginia Licensed Mortgage Lender