It's credit called by many names ranging from sub-prime, it's technical name to damaged, it's operative name. But in essence it means that even though a buyer has less-than-perfect credit, he can still obtain a less-than “A” grade loan---about the only type of risk-level mortgage available until a decade ago. Today, it's a whole new world. Many lenders have the ability to offer B, C, even D grade loans to credit-blemished borrowers' with a range of glitches from slow pays to bankruptcy!

Why are these loans vogue today and how do they work? The lending community, in a move to seize other streams of income, realizes that sub-prime loans are a potential customized growth industry (if the lender has the knowledge and desire to take them on since they can be problematic to rate and to package to sell to investors.) And second, lenders realize that heavy credit coupled with life situations out of a borrower's control like illness, divorce and death have made picture-perfect credit all but non-existent. Wanting to make loans to all types of borrowers, customized credit lends flexibility and greater “rule-of-thumb” reliability when evaluating less-than-perfect borrowers.

Are there general assumptions that lenders use to evaluate these credit situations? While all borrowers are evaluated on their own merits, most lenders want borrowers to have reasonably stable employment, fully documented income, assets, and liabilities with the purchase or refinance for a single family owner-occupied house or condo (not an income property). In other words, blemished credit requires a borrower to show a certain degree of personal stability even if his credit picture is marred.

Rated from A- to D, the higher the rating moves away from A, the higher the risk for the lender. For example, a “C” grade loan might go to a borrower who had as many as six late payments on installment debts (car payments) and four late payments on revolving accounts (like credit cards) during the last twelve months. Additionally, the borrower could have been late twice paying his mortgage! As you can see, that's considerably softer than required for traditional “A” grade loans.

Don't assume that sub-prime lenders will embrace borrowers who can't explain why they were late making payments, especially on a chronic basis. Lenders will still require verification of why slow payments occurred and what the borrower has done to prevent the situation from occurring in the future. While sub-prime loans do assist credit-blemished borrowers, it's imperative that consumers shop diligently with several lenders to obtain the best rates and fees even in a competitive lending market.

Being initially turned down for an “A” grade mortgage can find sub-prime borrowers jumping at the first lender willing to make a loan, causing them to overpay, exacerbating their marginal financial position. As with all potential loan products, comparing loan costs line-by-line for various programs through several prospective lenders will give the borrower the best comparison of the range of interest rates and points necessary to obtain this type of customized financing.

Published: August 18, 2000

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Julie Garton-Good, DREI “The Frugal HomeOwner™” As a syndicated newspaper columnist, author and international speaker, Julie Garton-Good DREI, C-CREC™, is called “America’s Home Affordability Expert”, addressing more than 25,000 persons annually on topics of real estate industry trends and home affordability. She is the author of five real estate books and is the sole two-time recipient of the international "Real Estate Educator of the Year" award from the Real Estate Educators Association. In 1997, The National Association of Realtors® nominated Julie as one of the fifty most influential people in the real estate industry. She shared the list with only three other women.