Competition lowers rates for credit risks Refinancing may help hundreds of thousands

Nation's Housing

August 02, 1998|By Kenneth R. Harney

IF YOU'RE one of the hundreds of thousands of homebuyers with less-than-perfect credit who've taken out so-called "A-minus" and "B" mortgages with double-digit interest rates in the last three years, you may be able to save some serious money in the market right now.

That's because intense competition, new mortgage insurance concepts, and declining interest rates have turned this summer into the best opportunity in memory for borrowers and homeowners with dented -- but not seriously mangled -- credit to lower their monthly bills or even pull out some equity cash.

Here's what's been happening. The mortgage market is split between loans for borrowers whom lenders deem to have "prime" credit -- they're most likely to make payments on time -- and those with "sub-prime" credit. Prime borrowers are "A" borrowers. "A-minus" applicants are almost there. They have minor flaws, such as having been 30 days late on a loan payment during the last year. "B" borrowers have additional dents and flaws -- two or three late payments, higher household credit card debt levels -- but they're basically solid citizens.

"C" and "D" borrowers present more serious risk of nonpayment; their credit files contain multiple instances of 60- to 90-day late payments within the last 12 months and beyond.

Lenders generally price their loans on perceived risk. A "D" home buyer may well pay double the interest rate quoted to a reliable "A" applicant, and pay substantially higher loan broker fees as well.

Though competition for sub-prime business has lowered rates in all categories of the market this year, the biggest shifts this summer have been in the not-quite-ready-for-prime "A-minus" and "B" segments. Rates in some cases have fallen to levels enjoyed by prime borrowers earlier this decade.

Not only are the behemoths of the mortgage industry -- federally chartered Fannie Mae and Freddie Mac -- weighing in to pump money to the best of the sub-prime applicants, but now private mortgage insurers are lining up to underwrite their credit, and allow them to buy or refinance with down payments or equity stakes as low as 3 percent to 5 percent.

On July 23 the largest mortgage insurer, MGIC, announced that it will now cover "A-minus" borrowers with subpar credit scores and high household debt-to-income ratios of up to 50 percent.

On mortgages up to $250,000, MGIC will insure borrowers with as little as 3 percent equity in

their homes. For loans up to $300,000, the minimum equity is 5 percent. For jumbo loans of $400,000, borrowers need 10 percent equity.

With mortgage insurance protecting lenders against loss on such borrowers, mortgage rates for the "A-minus" and "B" categories are likely to drop even further.

More important for homeowners who fit the criteria, they'll now be able to refinance, lower their rate, and pull out hard cash.

On a $400,000 refinancing, a homeowner with "A-minus" credit can now pull out up to $100,000 cash equity with an MGIC-insured new loan.

Even without mortgage insurance, homeowners and buyers with just slightly impaired credit histories should be able to find rates and terms in the market today that were inconceivable just a few years ago.

Whereas note rates for the entire sub-prime market began in the low double-digits and extended to the high teens barely three years ago, this summer "A-minus" and "B" category borrowers who shop aggressively can find rates in the mid-to-upper 8 and low 9 percent ranges.

The senior vice president of one sub-prime wholesale lender, Allen Hardester of Havenwood Financial in Owings Mills, said a well-established mortgage broker can get a "true A-minus" applicant a fixed-rate loan at 8.9 percent and a combination fixed rate/adjustable "2-28" mortgage beginning at around 8.5 percent.

A "2-28" carries a fixed rate for the first two years, and an adjustable rate tied to an international capital rate index for the remaining 28 years. Currently, the adjustable rate on such a loan is about 8.75 percent.

Homeowners with 2- or 3-year-old "A-minus" or "B" loans in the 11 percent to 13 percent range "can do a whole lot better than they probably think," said Hardester. His suggestion: Contact local brokers and get some comparison-shopping quotes.

If you're a true "A-minus" and a broker can't deliver you single-digit rates, Hardester says the broker is "not plugged into the most aggressive national lenders."

Second, get a copy of your credit report, correct any errors, and see if you can raise your score. For example, Hardester says, if you've got seven credit cards and two of them have $2,500 lines of credit you've never touched -- and probably won't -- close them out.

Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington D.C. 20071.

Pub Date: 8/02/98

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