Davemuti’s Weblog

Mortgages: Bad Credit and Little Equity, You still have Options

Hopefully this post will clear up the miss-information that mortgages are only available for those with credit scores above 740 and at least 20% for a down payment or as equity in your current home. This is simply not true. While this is what you should strive to achieve there are still many options for those that do not fit this mold.

Depending on how far off you are from the standard, the ultimate rate for your circumstances will increase anywhere from one quarter to two percentage points. The headlines and media coverage of interest rates at 5% (plus or minus as rates are constantly moving) for a 30-year fixed are reserved for primary residences with a loan that is no more than 75% of the value of the home and the borrowers credit score is 740 or better. Also, be advised that these all time low rates you see the media mention usually have one point associated with them but that is often not mentioned. That being said, we still have many programs today for refinance transactions as well as purchases up to 96.5% with credit scores as low as 600 and sometimes much lower. Believe it or not we can still offer 100% financing in some locations but that is for another post. The 3 important things for you to know as you proceed are:

1. Who you are dealing with
2. What type of transaction you are considering
3. What is the current value of your home

First, if dealing with a mortgage broker (rather than a local bank) they will be able to price traditional programs through national banks, local banks and wholesale lenders that do not offer mortgages directly to the consumer. While many local banks have rates that “can’t be beat” for the standard loan they may not have a program that suits your needs so you may have to start all over again? In addition, mortgage brokers will have FHA programs that do not consider your credit score and can often provide mortgages when traditional banks cannot. The key is to completely explain ALL of your circumstances to the person you are dealing with and don’t pressure them for “the best rate” as they have to research your situation. Also, you will be required to provide fully documented evidence that supports the income you make. Although there are still some programs available for self employed and stated income loans they are not as common and they are at a much reduced loan-to-value. If you are not completely forthcoming with accurate information, you will be in for a bumpy ride as the terms of what you are initially quoted may not hold up if the documents tell a different story.

Second, if it is a refinance you have to know the difference between a “rate and term” or a “cash out” refinance? If you are including anything other than the original mortgage(s) from when you purchased (and a little extra to cover closing costs) for your new loan amount, it will be considered a “cash out” refinance and your rate may be a quarter of a point higher than if it was not. This includes combining a first and second mortgage (unless both originated as part of your purchase financing), debt consolidation and/or if you are taking equity out of your house. Purchase transactions do not have to worry about this.

The last and what has become the most crucial aspect of any refinance today is what is the current value of the property in question. Unfortunately, no matter where you live today the value of your property is not what it once was. Some areas are only down 5% or so and others as much as 45%. This decline in value is wreaking havoc on many would-be refinance candidates as the amount of their mortgage is now near or exceeds the value of the property. Some mortgages that were once at 75% of the properties value are now at 85% or higher. Everyone thinks that their house is nicer than the others or that their market is not down that much. While that is nice to hope for the sad state of affairs is that it is not. For every client we are able to help refinance we turn seven away due to low property values relative to their current mortgage balance.

The current market value of any given property is determined by comparable sales in your neighborhood that have closed in the last 30 to 60 days. If no sales are available the appraiser will go out longer and/or broaden the search to find sales in other neighborhoods and/or similar properties. Of course it is more complicated than this but this is basically how it works.

Hopefully this has shed a little light on what is a confusing topic in today’s refinance frenzy. The moral of the post, unless your mortgage is more than the current value of your property a solution to refinance awaits. Call your mortgage planner and spend the necessary time fully disclose the information needed and find out if you too can capitalize on these historic low rates.

The above focuses on primary residences only. If you have a second home or investment property you will still have some options but the guidelines are stricter. Most glaring are much lower loan-to-value ratios. Call your mortgage planner today to see what is available for you.

About the Author: Dave Muti, JD, RMA is the author of “Pocket Guide Press 2008″ and a Senior Mortgage Planner with Millenium Home Mortgage, LLC located in Parsippany, New Jersey.  

For additional mortgage advice and answers to many mortgage questions please visit my site:  www.mortgageswhatyouneedtoknow.com