If you have some late payments to creditors or even a bankruptcy in the past you may still be able to get financing for your home. A large portion of this website explains rules, guidelines, etc. that pertain to conventional, conforming loans. Conventional, non-conforming loans have a whole different set of rules and guidelines.
What Is a SubPrime Mortgage?
Before jumping into non-conforming rules and guidelines, it is best if we define a non-conforming loan. In general, conforming lenders define non-conforming loans as "jumbo" loans. The type of non-conforming loan we are going to discuss in great detail has nothing to do with being a jumbo loan. As you may have read or know from other sources, a jumbo loan is a home loan for over $359,650. A jumbo loan is referred to as non-conforming because its larger size calls for more stringent and sometimes different guidelines than smaller loans.
We are more interested in defining the type of non-conforming loan for borrowers with past credit problems. These loans are considered non-conforming because lenders who offer them have much different guidelines and usually higher interest rates than for conforming loans. The purpose of this type of loan is to help people with credit problems obtain home financing and/or refinancing of their current mortgage. In the mortgage industry, this type of loan is called a "B" or "C" Loan (Conforming loans are called "A" loans). For brevity, we may refer to this as a "B" loan in the future. Conforming lenders also like to refer to B-loans as "sub-prime" loans.
Are Non-Conforming Loans Only for people Who Have Had Credit Problems?
Nonconforming or stated income loans can be used by people with good credit whose debt ratios are too high to obtain a conforming loan.
How Are Non-Conforming Guidelines Different Than Conforming Loan Guidelines?
For B-loans there are no hard and fast underwriting rules. Unlike conforming loans, each lender does not have the same basic guidelines. There are as many different sets of underwriting guidelines for B-loans as there are B-lenders. With non-conforming loans a borrower can shop around with many different brokers and lenders, attempting to find the best rate and/or lowest closing cost to suit them. If you have credit problems and need a non-conforming loan, your shopping becomes very limited. Although not true in all cases, with credit problems, you should be searching for a broker or lender who can get the loan completed while charging the least amount of up front points. Frontier Mortgage takes pride in being very fair with points and fees charged to borrowers with less-than-perfect credit.
Who Can Use a Non-Conforming Loan?
We have attempted to make the list below as comprehensive as possible. Hopefully, we are addressing your situation with this list, but if we do not or you are not quite sure if you are eligible for this type of loan, please E-mail or call us about your situation. It never hurts to ask or apply for a loan online and it will not cost you anything.
Potential borrowers who are living with the types of circumstances and situations illustrated below may be eligible for non-conforming financing and in many cases Frontier Mortgage will be able to save you a lot of money:
- You currently own a home, have equity, and need to pay off other bills and/or collections.
If this is the case, you can do a cash-out refinance or debt consolidation refinance. The equity you have in your home can be used to pay off other bills, get rid of high interest debt, and greatly reduce your monthly payments. This is food for thought: Conforming lenders allow you to do a cash-out/debt consolidation refinance at up to 80% LTV. Non-conforming lenders may allow you to do the same type of refinance transaction at up to 95 or even 100% of the value of your home.
- You have had a bankruptcy in your past or are currently in bankruptcy.
Usually, the longer you have been out of your bankruptcy the better your interest rate will be. Keep in mind that a bankruptcy is a serious hit to your credit. If you have had a bankruptcy but have not established any new credit since, your chances of getting new mortgage financing are not very good. Also, if you are currently in a bankruptcy (it has not yet been discharged) you will not be able to get financing for greater than 75% of the value of your home.
- Contract for Deed or Lease Purchase Agreement.
This applies if you are currently renting a home from an individual and your lease is written such that a portion of each monthly payment goes toward equity in the home. After twelve monthly payments (one year's worth) are made you may be able to exercise an option in the contract of purchasing the home. Conforming lenders do not allow any portion of your lease payment to be considered as equity in the home. Many non-conforming lenders consider this to be a refinance transaction and will allow you to get a home mortgage based on the fact that you now have equity in the home. Remember, depending on your credit, you may have to come up with additional funds so that you have enough equity in the home to meet the lender's underwriting requirements.
- Gift Equity Purchase.
If your parents currently own a home that you live in or want to buy from them you can do it with a gift equity purchase. Parents or other immediate family members can help you get into a home without actually giving you cash. Instead, they can give you equity in the home that you can use as a down payment. As a general rule, but not always the case) you must still come up with 5% of your own funds for the down payment.
- You currently pay cash for everything and have no credit.
As strange as this may sound, when you pay cash for everything and have no debt, it is not necessarily a good thing if you are trying to buy a home. The only way a lender will feel comfortable lending you money for a home mortgage is if you have a history of making debt payments on time. If you have no history of making payments, lenders do not know if you are capable of making payments and, unfortunately, are forced to assume the worst case scenario. A non-conforming lender will not assume that you are going to be the best credit risk but will grade you as a middle-of-the-road risk and will usually give you the opportunity to obtain a home mortgage.
You make your payments on current debt but do not always make them on time.
If this describes you, then join the club. B-lenders cater to customers like you and these are the most common non-conforming loans.
- You have made late payments on you mortgage in the last 24 months.
This type of customer is very similar to the customer above. If you have one late payment on any mortgage during the last 24 months and the rest of your credit is squeaky clean, you may be able to get conforming conventional financing. If you have any more than one late payment, you will most likely have to get a non-conforming loan.
- You have multiple collections against you in the past two years.
In general, conforming lenders will not allow you to get a home mortgage if you have any open collections against you. B-lenders will allow collections to remain open in many cases.
You have any type of debt judgements or tax liens against you.
Conforming lenders almost always require that any judgements and tax liens be paid off before you can get a home mortgage. B-lenders may allow judgements or tax liens to remain open in many cases.
- You are self-employed, have credit problems, and your income is difficult to verify.
Some B-lenders allow you to state your income and they will not verify the amount that you state. Keep in mind that this type of loan usually requires a larger amount of equity in your present home or for the purchase of a new home.
Please understand that if any of these criteria apply to you, you must disclose them up front during the application process. If you do not disclose this information up front, it will be discovered at some point during the mortgage loan process. In most cases, serious negative credit information discovered late in the application process will kill the loan, wasting everyone's time and effort.
IMPORTANT NOTE: THESE ARE GENERAL RULES AND ASSUMPTIONS. AS WITH ANY RULES, THERE WILL BE EXCEPTIONS, AND THEY COULD BE IN YOUR FAVOR OR AGAINST YOU.
How Does a B-Loan Help You?
You may be asking yourself why you should try to obtain a non-conforming loan when interest rate and payments will be higher than a conforming loan. Here are some reasons:
- First, you are not able to get a conforming loan if you have credit problems.
- By obtaining a B-loan, you can get your credit back on the right track. If you make all your payments on time after obtaining a non-conforming loan, you can refinance your home mortgage within 12 to 24 months and usually obtain a lower interest rate and lower payments.
- If you have a lot of debt and high monthly payments, a debt consolidation loan can greatly improve your cash flow situation and get you back on your feet financially.
What Is Different About the Non-Conforming Loan Process?
The B-loan process as a whole is generally the same as the conforming loan process. The biggest difference occurs at the very beginning of the mortgage process. When you first apply or are attempting to get pre-approved, Frontier Mortgage checks your credit to see what type of potential borrower you are. If you are a conforming customer, Frontier Mortgage will give you the best conforming rate and terms available. If you are a non-conforming customer, Frontier Mortgage must figure out what classification or "grade" you fall into. Frontier Mortgage accomplishes this by sending the information that you have provided to us to one or more B-lenders to find the best rate and terms available. This usually takes between 24 and 72 hours. After this phase is complete, and you agree to the terms provided, your loan process should be completed as smoothly as any conforming loan.
Frontier Mortgage, 12400 Olive Blvd, Ste 425, St. Louis, MO, 63141: Phone: 314-205-2900 Toll Free: 800-456-2900
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