Bad Credit Loan = More Chance of Getting a Raw Deal?

David · Joined: 19 May 2004 Posts: 754 Location: Atlanta, GA

I know these days that loans to people with bad credit are becoming more comptitive. We live in turbulent times, and people make mistakes with their finances.

But I am wondering if it is the people with bad credit that run the risk of getting taken for a ride. There is the old phrase, "desparate times call for desparate measures." Is it the people with the bad credit that take these "desparate measures" only to find themselves in a worse predicament than when they started?

capnmorgan5555 · Joined: 29 Jan 2005 Posts: 29

David,

I think it really depends on the person needing the money. There are people that get taken advantage of in all walks of life including good credit and not so good credit.

My experience shows me that there are more people in sub prime that will take advantage of someone than on the prime side. I know that there are people that won't do a loan for less than 5 to 6% or will go to where they are just below the HOEPA triggering point and they are all in the sub prime market.

All in all, sub prime loans are more difficult to do than prime loans so one should make more money on them if it is more work or they better know how to package a deal to get a better deal for the client then they deserve to make more money.

I got my start in 1990 in the sub prime arena with a finance company but over the years I have really gotten away from it. Lenders change their guidelines in the middle of underwriting, most are a pain to work with and in October 1998 when several sub prime lenders went out of business over night I decided this wasn't where I wanted to have my business come from- so I have changed over my practice to more of a mortgage planner with mostly prime loans. I would say that sub prime is less than 4% of my business.

Some of the perception of "being taken advantage of" in the sub prime market comes from the fact that the consumer pays a higher interest rate. If someone truly qualifies for a sub prime loan then they have done something with their finances/credit to deserve to pay a higher rate.

What I have been seeing more of lately is the sub prime only shops getting prime borrowers and sticking them into their sub prime products- Ameriquest is a prime example of this. Lately I have had 4 or 5 people that have come to me saying that Ameriquest had offered them something much higher than what they had seen in the paper and since they had good credit they wondered why they had to pay a higher rate. Luckily, they shopped around.

The consumer has to take some responsibility for themselves, either research it, or get a referral from someone you trust to someone they trust. Otherwise you may end up with someone that will "stick it to you."

I hope this helps.

David · Joined: 19 May 2004 Posts: 754 Location: Atlanta, GA

Definitely excellent points you made.

I can certainly understand how a person with bad credit would often be "higher maintenance" on average, and therefore charging a higher than average fee might be more appropriate.

I can also see how the perception of getting treated badly simply because they are paying a higher interest rate when in reality it is the consumer who placed themself in the position to pay that higher rate in the first place.

I may have just repeated what you just said, but it sometimes helps me to understand by writing. :lol:

Mac · Joined: 04 Feb 2005 Posts: 276 Location: Knightdale, NC

Keep in mind that if there was no "sub-prime" many people today would not own their homes or businesses.

There was a time when Beneficial Finance (they've caught a lot of heat over the years) was the only place a Negro (yeah, I know that term is not politically correct) could get a home loan or to use the equity in their home to build a business for themselves due to "red-lining" in the banking industry.

Do sub-prime loans cost the consumer more? Absolutely. The rate is reflective of the risk. FHA does the same thing, they just call it PMI. In many cases a sub-prime loan is less costly than an FHA loan just because of the PMI factor.

Let's take a $150,000 home purchase for example.
An FHA loan can be booked with as much as 4% YSP to help cover closing costs. Great deal right?
$150K @ 5.5% (par) @ 360 = $851.68 P&I only.
$150K @ 7% (4YSP) @ 360 = $997.95 P&I only.
A difference of $146.27 monthly which equates to a paltry $52,657.20 over the life of the loan. PMI could be an additional $150 or more a month.
My point is that many a conforming borrower gets put into an FHA loan because the LO can charge it on the back, not have to explain their front-side fee and think they have done their buyer justice. It's called a "No Cost" loan. LOL

There are abuses on all sides of this business. The sad fact is that a lot of LOs don't even know they are abusing.

capnmorgan5555 · Joined: 29 Jan 2005 Posts: 29

Mac,

I don't disagree with most of your statement, but FHA doesn't have PMI it's MIP since it is a government insured loan and it is nowhere near $150 a month.

FHA has an upfront mortgage insurance premium that is built into the loan of 1.5% which if the base loan was $150,000 is $2,250 which at your 7% scenario is $14.97 a month as a part of your principal and interest payment and the monthly mortgage insurance premium is .5% of your base loan amount /12. So say $150,000 was your base loan amount it is $62.50 a month so the actual MIP for this loan as an FHA is $77.47 compare that to traditonal monthly PMI on a 95% LTV conventional loan which is $97.50 (none of it tax deductible).

Many times if you compared a 5% conventional with monthly PMI and a minimum down FHA, if you aren't making 4% in YSP and the rates are similar the payment on the FHA loan is actually lower.

Just wanted to clarify.

Now, lets discuss your statement that a sub prime loan is in many cases better than FHA. I have a borrower with a 575 credit score that I can do FHA (I do them all the time) because their credit issues are older, I don't have to pay off medical collections and they have been on time the past 12 months.

Today I can do a 30 year fixed rate at 5.75%(I don't have my lenders rate sheet today but it pays probably 2 to 2.5%-let's use 2.25%) let's say $150,000 purchase, I can use down payment assistance and another $2,000 from the seller gets my guy in for no money.

So my base loan is $146,625 and after my UFMIP I am at $148,824 (so my 2.25% makes me $3,348.54) My rate is 5.75% fixed so the P&I is $868.50 and the monthly MIP is $61.09 so my payment (before taxes and insurance) is $929.59.

So to be fair you have 3% (3% of $150,000 is $4,500 plus $285 fee for DPA and $2,000=$6,785) to work with. Where can I find a full doc 30 year fixed subprime loan on a $150,000 house that has a payment lower than $929.59 (need a 6.31% rate on a 100% financing) that pays me $3,348.54? Heck I'd even give you a credit score advantage say 600?

Please don't think I am trying to be a prick, I truly want to know where I can find this animal. I hear other mortgage people say this all the time, "I don't need FHA I can get a better deal with sub prime," and in my 15 years in this industry I am yet to see it. Who is it better for the broker or the buyer? I doubt you could even find something to match this with a 2/28 with a 2 year pre-pay.

Thanks

Mac · Joined: 04 Feb 2005 Posts: 276 Location: Knightdale, NC

Good points.

My issue is when an 800 score borrower is put into an FHA loan. It happens, I've seen it.

capnmorgan5555 · Joined: 29 Jan 2005 Posts: 29

I agree with that.

We should always try to put the client in the best possible loan for them, not us, even if that means referring them out to someone that does something you don't do. I know most wouldn't do that, but I have gotten a ton of referrals from people I have done that for.