Just because we can do an FHA loan at 580 FICO, does that mean we should? By: Jason Hillard


this post was originally published on home loan ninjas on July 2nd 2010

Perhaps the biggest advantage to being an affiliate branch of a mortgage bank is our inherently “hybrid” nature. We are the bank; we have more responsibility and control than ever before. However, there are some hard and fast guidelines that all loans we originate and underwrite “in-house” must adhere to. These are policies that ensure our good standing with the investors we sell the loans to. Without access to these investors, we wouldn’t be in business because we do not service loans.

One of these steadfast rules is a minimum FICO score of 640, regardless of the loan program. This is where the “hybrid” nature of our operation kicks in and really sets us apart from a traditional bank. If we have clients that don’t meet certain underwriting criteria as prescribed by our investors, we can broker the loan to another bank. Hybrid: part bank, part broker. It really is a beautiful thing because it allows us to assist more customers than before. And we can be faster on our feet because we aren’t always relying on third parties, and provides more options to the consumer.

A quick perusal of the matrix of banks we are brokered with yielded a surprising tidbit of information: we can still do an FHA loan down to a 580 credit score.

This, of course, brings up an important question…

Just because we can, does that mean we should?

My partner and I, as I have previously mentioned, rarely fill out a client’s home loan application the first time we talk to them. Many people out there don’t qualify for their “ideal” mortgage right away. Others don’t know how much income they truly make. The point is, we get to know the down and dirty details before we begin the process in earnest. Outside of a few exceptions, this is the only responsible way to do business.

Now many times one of those details is a “less than perfect” credit score. Frequently, this can be remedied in 6 to 12 months with a little hard work, diligence, and a willingness to pay the items that are negatively impacting the client’s credit score.

We help people climb back up. Its what we are supposed to do. We are advisors, not just salesmen.

Can you make a case in the post-bubble (fingers-crossed) era for doing loans for people with a 580 credit score?

Right now, we have quite a few clients that are in this range. Actually, we always do because we talk to a lot of people and we don’t believe in simply turning people down with no plan to become “approvable”.

So how do we determine whether or not to proceed?

The answer, to me, lies in whether or not the consumer is climbing the stairs up, or riding the slide down.

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Let’s say we had a client come in to review their credit history with us 6 months ago, and at that time, their score was 493. We highlighted a plan of action, and they set their minds to achieving those goals. Let’s now assume that client followed all the steps and now they have a 597 credit score. They mention that they saw a house for sale over the weekend that they absolutely fell in love with. They want to know if they can get approved to purchase the home. I am morally OK with my Originator beginning the process with them. They have worked hard to improve their situation, and want to take an advantage of the opportunity to buy a house they really want, rather than settling for something now and trying to upgrade later.

Now let’s look at another situation that isn’t uncommon. A borrower comes to my mortgage company to get pre-approved to buy a “to be determined” property. They have a 641 credit score at the time of application. They start house-hunting, but can’t find anything they want for 60 days. Then they find something, put an offer in, and the offer is rejected. They put an offer in on another house; this one’s a short sale. They go back and forth with the seller over the next few weeks about closing cost concessions and inspection addendums. Suddenly the credit report is over 90 days old, which means we have to pull a new one. Low and behold, the borrower has maxed out a credit card, or taken a new loan out and missed a payment. Their credit score has dropped to a 599. Should we go ahead with the home loan?

The answer is not so clear cut, but I am damn certain about this: we are not acting in the consumer’s best interest if we don’t at least review the situation with them and determine the delinquency’s validity. It’s not professional to negotiate a mortgage for someone who is on the slippery slope of credit decline.

We aren’t trying to be “negative”, just honest and professional. The collective irresponsibility of borrowers, brokers, lenders, and banks got us into the current mess, and professional responsibility is the only way to prevent a repeat.

question mark image credit  Image: jscreationzs / FreeDigitalPhotos.net

slide image credit Image: Tina Phillips / FreeDigitalPhotos.net

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Panel Is Critical of Obama Mortgage Modification Plan, by David Streitfeld, Nytimes.com


The Treasury Department’s loan modification program, which has been criticized as ineffective almost since its inception, came in for another battering in a Congressional report released Tuesday.

Only about 750,000 households will be helped by the Home Affordable Modification Program, which pays banks to modify loans under Treasury guidelines. That is far fewer than the three million or four million modifications promised in early 2009 by the Obama administration, the Congressional Oversight Panel said.

The panel’s report calls the program a failure, although Senator Ted Kaufman, a Democrat from Delaware and chairman of the panel, declined to go that far in a conference call with reporters.

“The program has turned out to be a lot smaller and had a lot less impact on the housing market than we thought,” Mr. Kaufman said.

One reason: the loan servicers, who act as middlemen between the distressed homeowners and the investors who own the mortgage, often find it more profitable to foreclose than modify. The modification program provides incentives for servicers to participate in the program but no penalties for their failure to do so.

The oversight report estimated that the modification program would spend only about $4 billion of the $30 billion approved for it. With the deadline for reallocating the money having passed, “an untold number of borrowers may go without help,” the panel said.

Tim Massad, acting assistant secretary for financial stability, said at his own press briefing that the criticism was “somewhat unfair.”

Aside from the borrowers directly helped by the modification program, Mr. Massad said, many others have been helped indirectly, as servicers used the government standards in proprietary modifications.

The program “is having a real impact on the ground, even though I certainly acknowledge there are a lot of challenges and a lot of difficulties,” he said.

One of the challenges is a persistently weak housing market. Many households that have won permanent modifications are still heavily in debt, which leaves them vulnerable to redefaulting.

If the redefault level rises significantly, Mr. Kaufman said, “that’s a lot of taxpayer money down the drain with no effect.”

Other members of the oversight panel include Damon Silvers, director of policy and special counsel to the A.F.L.-C.I.O., and Richard H. Neiman, New York superintendent of banks.