White Knight Loans for Hard Luck Borrowers

By Steve Marantz

If you are seeking a home loan, but have a recent history of bad credit, or have an uneven employment record, or your business has fallen on hard times, you may find it impossible to borrow through standard programs.

There is a solution, however, if you are willing to pay an interest rate 2 to 4 points above market. You may be able to obtain a "non-conforming" mortgage, also known as 'A minus', 'B', 'C', and 'D' paper. Such loans are made with relaxed underwriting criteria that allow for problems or unusual circumstances which do not necessarily reflect your ability to make payments.

Several area lenders make non-conforming loans, among them Assurance Mortgage of Massachusetts and Connecticut. Assurance's non-conforming programs handle problems such as slow credit, mortgage "lates", un-verifiable income, high debt ratios, substandard zoning, foreclosures, charge-offs, and bankruptcies.

"A lot of times we're perceived by borrowers as coming in on a white horse," says Jerami A. Marshal, Assurance Senior V.P., Non-conforming loan division.

Following are two examples of non-conforming loans made by Assurance in 1994:

"A Minus"

A couple seeking a $104,000 loan to purchase their second home was rejected for a conventional mortgage, despite having a 10 percent down payment. The couple already had signed a Purchase and Sales Agreement on the sale of their first home when it was rejected.

The rejection caught the couple off guard. The man, employed in high-tech, had been laid off in 1993, causing a couple of late mortgage payments. Since that time, the couple had sold their first house and the man had found a new job at less pay. They were denied a conventional mortgage because of the late mortgage payments, and because their debt/income ratio would have been 41 percent (standard is 38 percent).

Assurance made the non-conforming 30-year fixed loan at 10 3/4 percent, at a time the market rate was 9 percent. The monthly payment was $135 higher than it would have been in a conventional loan, and the housing/debt ratio was 45 percent.

"The borrower was ecstatic," says Marshal. "He had already accepted a Purchase and Sales Agreement on his first house but he didn't make it contingent on getting financing. So he avoided litigation on that deal. They were like a lot of people. They didn't realize they would have a problem until it was almost too late."

"D"

A man's $250,000 house was in foreclosure as a result of falling far behind on mortgage payments to a private lender on a loan obtained at an exorbitant 18 percent interest rate. His payment problems were caused by the decline of his construction business, and the pressing needs of feeding his large family. However, the man had sizeable equity in the house. Based on the equity, Assurance approved a $175,000 loan, a six-month adjustable at 11 1/4 percent, for which the rate may rise 1 percent every six months, with a capped increase of 6 percent. The approval came through two weeks before the house was scheduled to go into foreclosure.

"We could make the loan because we understood that he had fallen onto hard times, but that it was an isolated case," says Marshal. "Ideally, he gets his company back up and running, and within 24 months he could go for a refinance if he has a perfect mortgage history."

Realistic Risk

"It is a misconception that closing costs are higher for non-conforming loans," Marshal says. "In most cases closing costs are the same. But non-conforming loans cannot exceed 90 percent of the value of the property (conventional loans go as high as 97 percent of value of the property). A borrower must have a minimum of ten percent down payment. Five percent of the down payment must be the borrowers own funds, and five percent may come from a gift."

"History shows that most borrowers of non-conforming loans are able to refinance into a conventional loan within three years," Marshal says.

"Non-conforming loans are a means for the borrower to facilitate their loan transaction now, when other avenues are exhausted," says Marshal. "Lenders take a realistic look at the borrower's ability to repay the loan and evaluate the borrower's credit, assets and property using a common sense approach in risk analysis."

One of Assurance's most memorable non-conforming loans was for the purchase of a horse farm in Hamilton, recalls, Steven Edelstein, Assurance Managing Partner.

"The borrower was a foreign national and had been in the country for seven years but had no money history," says Edelstein. "No bank would do it. We did it, and we haven't had any problems. At Assurance, we try and give everyone a chance."

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