Cultivating credit Finding a way: For those seeking first mortgages, the climate has never been better, even if borrowers have less than perfect credit.

March 31, 1996|By Amy L. Bernstein | Amy L. Bernstein,SPECIAL TO THE SUN

Let's suppose you are a lifelong renter who has long dreamed of owning a home, but you've given up on the idea because you can't muster a down payment. And you know your credit record isn't perfect, either. So you think there's no way you could get a mortgage approved.

Think again.

In the greater Baltimore area, and around the country, the climate for first-time mortgagees -- even those with moderate incomes and shaky credit -- has never been more favorable.

And you won't have to pay loan-shark interest rates for the privilege of borrowing. If this sounds too good to be true, and you're wondering where the catch is, there isn't one.

Chalk up your potential good fortune to an unusual set of economic circumstances. In the mid-Atlantic region in particular, traditional homebuyers -- those earning roughly $40,000 to $60,000 -- are not buying and selling at nearly the rate they once were, owing to an increase in corporate layoffs and relatively stagnant wages.

This slowdown in mortgage lending activity has contributed to the recent spate of bank mergers and general consolidation in the mortgage loan industry. Still, there are more lenders than borrowers, so competition for borrowers' business is fierce.

The upshot, says Mike Cordes, president-elect of the Maryland Mortgage Bankers Association, is that the mortgage market now is composed of a relatively greater proportion of people from lower-middle-class or moderate-income groups.

Statistically speaking, Mr. Cordes says, this group of people "tends to have a greater percentage of credit problems."

This presents lenders with a dilem- ma. They must either find creative ways of selling loans to a slightly higher-risk population, or miss out altogether on considerable pent-up market potential.

Naturally, lenders are interested in their bread and butter -- finding borrowers. And that's good news for anyone who's had some trouble managing debt in the past, for it signals a willingness on the part of lenders to work something out, if the circumstances are right.

"I think that lenders are looking to create categories in between good and bad credit," says Patty Swisher McGill, president of the National Association of Mortgage Brokers. "We have to have a perfect category and we have to have a category where there are dings and bruises."

"And we have to have a category where there's a pretty severe cut" with respect to credit, Ms. McGill says. "Of course, lenders are going to price those [options] differently, but they're not going to close the door as quickly."

In practice, this means lenders and brokers are adjusting their loan-approval criteria. Typically, they have weighed three factors: creditworthiness, income and job stability. In the past, if your credit history revealed defaults on credit cards, car payments, and other bills over the last seven years (10 years if you've ever declared bankruptcy), your chances of qualifying for a home mortgage at a favorable rate were reduced. If your annual income fell below $40,000 and you hadn't been employed steadily, your chances of getting approved at all were narrower still.

Today, however, lenders are "expanding past the traditional credit history items," says Clarence Snuggs, a vice president with Signet Mortgage Corp. who heads community development in the Baltimore region. For the first time, lenders like Signet are looking at how potential borrowers handle obligations that didn't used to show up on the evaluation radar screen, such as utility and rental payments.

Even personal references now count for something. And instead of looking at seven years of debt management, Mr. Snuggs says, lenders are concentrating on the last 12 to 24 months, to see whether credit has been managed successfully. Such efforts are in keeping with lenders' strategies for dealing with a less traditional -- but not necessarily less reliable -- category of borrower.

"From a practical perspective," Mr. Cordes says, "most lenders are doing everything they possibly can to give marginal credit a second or third look." In Baltimore, for example, nearly 70 percent of loans originated by NationsBank in 1995 went to low- or moderate-income borrowers -- those earning roughly $48,000 or less.

"NationsBank is willing to do the unconventional to stimulate economic revitalization in underserved communities," says community investment coordinator Steve Fitzgerald, who works in the Baltimore office.

If by now you are emboldened to approach a bank for a mortgage loan, take note. Most large lenders, such as Signet and NationsBank, do not work directly with low-income borrowers or with individuals who may need to repair their credit or otherwise clean up their financial records before they're in a position to borrow.

Instead, these institutions work in tandem with local nonprofit agencies that counsel would-be homebuyers on pre-purchase matters, credit repair and debt management. Some agencies also operate as lenders for low- and moderate-income borrowers.

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