Everyone has their credit ups and downs.  There are loans specifically for imperfect credit individuals.

Imperfect credit is also called subprime credit.  People may drift in and out of being a subprime borrower.  Multiple late payments on your mortgage, collection accounts, judgements, and tax liens are a few things that may show on an imperfect/subprime borrowers credit report.  In time, these items disappear and your monthly FICO credit score will increase which will give you more of a chance to obtain better interest rates and lower closing costs. 

Keep in mind, the more recent the credit infraction, the worse your credit score will be, meaning a higher interest rate.  If you have paid all of your obligations on time for a year, you can get a slightly better interest rate on your next loan.  If you have paid all your obligations on time for 24 consecutive months, you may be able obtain an even better rate depending on how severe the credit issue.

As of September 2008, Fannie Mae and Freddie Mac lending have tightened guidelines.  You may have to wait up to 5 years from the date of foreclosure and 7 years for a discharged bankruptcy.

There are a few subprime lenders who require less time to pass from the delinquency date, but they are hard to find these days, but there are a few still available. 

FHA loan guidelines are more lax than Fannie Mae and Freddie Mac and there is also the "hard money" lenders out there.  Be aware of hard money lenders, their fees and rates are high, but for some it's the only alternative.   

Keep in mind you will not keep this type of loan forever!

Imperfect credit interest rates are anywhere from .50% to 3.5% higher than "A" paper real estate loans.  It all depends on a few things:

1. How low your FICO credit score is at the time you apply for the loan.

2. What income documentation type of loan is needed (see main menu for loan types).

3. Do you have the ability to verify your assets or not (again read thru the loan types).

4. What type of property is being financed ie...a single family residence, condo etc...

5. How large of a loan is needed vs. the value of the property.

Call me for details!

Kevin Walton

Cell: 805-276-1942

The imperfect loan should be a temporary solution

Once you clear up your credit issues, and any other issues that kept you from obtaining a better interest rate, you can obtain another loan.  The key is not to make the same mistakes, and do your utmost best to pay your bills in a timely manner.

Try not to pay too much in fees on an imperfect credit loan

Your interest rate is going to be higher as well as your closing costs to obtain an imperfect credit loan.  However, make sure you don't pay too much in lender origination fees, because remember in a relative short period of time, five years or so, you will be refinancing your loan again to get a better interest rate once you've cleared up your past issues.  Try not to pay any more than 1.5 points in lender origination fees because remember when you re-do your loan you will pay fees than as well. You will also have to pay the other closing costs as well, ie.. title insurance premium, escrow, appraiser etc..To learn more on closing costs, click on closing costs which is located on the main menu.

Do not buydown your interest rate since the loan will be short term

A buydown on your interest rate, means you are paying additional lender discount points, to obtain a lower interest rate.  For example on a $400,000 loan, one point is equal 1% of the loan amount, $4,000.00.  Try not to pay any more than 1.5% in lender origination fees, as stated above, which in this example is equal to $6,000.00.  This origination fee is income to the lender for funding the loan.

However, discount points are additional point(s) that borrowers pay to the lender to obtain a lower interest rate.  If a lender offered you an interest rate of 8% with a 1.5% origination point, they may also offer you a 7.5% interest rate in exchange for paying them a discount point (1% of the loan amount).  So you would be paying $6500.00 in origination points, and another $4000.00 in discount points.

You only want to pay discount points on a loan you intend to keep for 10 years or more.  Even though the rate is lower when you pay discount points, the point you paid to buy down the rate, takes a full 120 months to pay for itself and if you are just going to re-do the loan anyway in a few years once your issues are behind you, it doesn't make sense to think about buying your rate down-paying discount points.

Protecting yourself against predatory lenders

Have you ever heard of the saying " some people want to kick you when you are down"?  In lending that saying rings true.

You must get everything in writing upfront.  Good Faith Estimate, and Truth in Lending are two vital documents that lenders must furnish to you within 3 business days of them taking an application. 

The Good Faith Estimate will have all the fees listed.  Do not pay for an appraisal until you have the Good Faith Estimate.

Review the fees, loan program, and interest rate to make sure the numbers make sense before shelling out $350.00 for an appraiser.

Also keep in mind, if your loan request becomes a bit more complicated during the processing period, additional fees may be incurred, so the Good Faith Estimate is just that, an estimate.  However, if the loan origination fees are fair in the beginning, they will be in the end too.

Credit repair companies-stay away!

There is a new innovation in real estate lending, and it's called the credit simulator.  For an additional $35.00 fee, your Loan Consultant can run your credit report.  If your FICO credit score is in the imperfect range (read below), your Loan Consultant has the ability to run your credit report through a credit simulator offered by the vendor that the Loan Consultant used to pull your initial credit report. 

The simulator will give a "what if" situation.  For example, what if you paid off an outstanding collection account, or paid down your credit card balance by $500.00, how much higher would your score go?  This way you know exactly what issues will affect your FICO credit score the most.

Sometimes paying off a 3 year old utility bill that is in collection because of a dispute you had with the company, can hurt your FICO score than help it.  For an additional $35.00, the simulator is worth every penny.

Credit repair companies, are unreliable, and many times operate outside the law.  Their fees are horrendous, and many times your FICO score remains the same.  Don't take the chance.  With the simulator and some hard work on your end, you may be able to raise your FICO score by up to 100 points and save yourself thousands of dollars by being able to obtain better terms on your real estate loan.

What is an imperfect credit score?

Most imperfect credit lenders say that anything less than a 620 credit score is classified as imperfect credit. 

What is a prepayment penalty?

As of September 2008, there is sweeping legislation that may involve eliminating prepayment penaltys.  It hasn't passed yet, but it may soon.  A prepayment penalty is a fee you have to pay if you payoff your loan in full, before an agreed upon date you make with the lender.  The prepayment penalty is usually equivalent to 6 months of interest which is pretty much 6 months worth of payments!  In exchange for a borrower having some credit issue, or if the borrower wants a portion of loan fees waived, the prepayment clause may go into affect.

Before signing your final loan papers or having your interest rate locked, ask your loan originator point blank if you have a prepayment penalty.

Than check your most recent Truth in Lending document that was sent to you by your loan originator.  Three quarters down the page there is a clause that says "prepayment penalty disclosure" with two boxes.  One box says that you "may" have the right to prepay your loan at any time, and the next box says "you may not" have the right to prepay.  If the "you may not" box is checked, your loan is moving forward with the prepayment penalty, and it is up to you to stop the process or renegotiate with your lender.

  

Pay the higher rate to avoid a lenghty prepayment penalty period

Six months of interest is pretty much six payments since not a whole lot goes toward your paying down your principle balance, especially the first 10 years ofo the loan.  Since you are going to keep this loan no more than a few years, take the higher interest rate to keep  your prepayment penalty to a 2 year period.

You want your prepayment penalty period to match your fixed rate period.  If you are getting a 5 year fixed loan, opt for a 2 year prepayment penalty period or less.  Do not take a 2 year fixed loan and a 5 year prepayment penalty just to get .50% lower on the interest rate.

The difference in the monthly payment over a 24 month period doesn't come close to what a six months of interest adds up to.

Bankruptcy and foreclosure issues

As of September of 2008, obtaining a loan and having a foreclosure or bankruptcy is getting very difficult.  FHA loans my be the best option at this time if it has been less than 5 years from your bankruptcy and foreclosure dates. 

Hard Money Loans

These loans are collateral based loans.  If you have ample equity in your home, or a large downpayment, say 35%-40%, you can get financing.  It doesn't matter what your FICO credit score is.  If there is enough equity, that's what the hard money lender is interested in. 

Many of these borrowers don't have a choice. They have been turned down by several imperfect/subprime lenders and have nowhere to go.

Rates on hard money loans have improved over the years, it's the fees that can add up.  A 5 year fixed loan at 9.5% interest only with no prepayment penalty is a typical hard money deal with at least 35% equity in a property.  You may have to pay 5 points to get the loan, but remember, this is a short term loan, not something you keep for 30 years.

Call me for more details or click here to apply on-line!

Kevin Walton

Cell" 805-276-1942