WASHINGTON-- Mortgage applicants with dents in their credit histories are about to get a creative new alternative: Call it the credit rehab loan. Or the sinners' redemption mortgage. Or call it by the name its sponsor uses -- the performance loan.
The concept is so simple you wonder why lenders haven't offered it before. It works like this: If you as a borrower demonstrate that you can make your monthly mortgage payments on time, then you should qualify for a lower rate. After all, you've performed -- you've shown you're a good credit risk.
After two years of timely payments, we'll cut your rate by either one-half of a percentage point or a full one percent. You won't have to refinance or reapply for the break. It will be built into the original loan contract. You'll get it automatically unless you blow it by falling behind. The definition of timely is generous, by the way. All you have to do is pay within 30 days of the monthly due date, and you qualify.
Although the idea could be applied to any segment of the home mortgage market, the performance loan program scheduled for introduction this month is aimed at what's known as the "A-minus to C" category of borrowers. This includes vast numbers of homebuyers and refinancers who don't quite fit into the standard underwriting molds used in the mortgage industry.
They may have missed a few auto loan payments or been late a couple of times on the mortgage. They may have suffered an unexpected drop in income because of a sudden illness, a divorce or a corporate layoff. Whatever the specifics, they are sub-prime credit risks and can't qualify for the sort of conventional mortgage financing provided through the biggest national sources -- Fannie Mae and Freddie Mac. They may well qualify for financing somewhere else, but at substantially higher rates and fees.
Enter the performance loan concept. Created by the Independent National Finance Corp., a large, San Marcos, Calif.-based lender with correspondents in every state, the mortgage is essentially a two-step program. For the first two years, the rate is fixed. From year three onward, it turns into an adjustable-rate mortgage with adjustments every six months. The rate discount for borrowers who qualify after two years comes off the adjustable-rate margin -- the percentage tacked onto the base index rate -- for every adjustment period.
Gregory J. Bowcott, CEO of Independent National, says the performance loan idea is designed for sub-prime credit applicants "who have experienced a temporary setback -- they're in the penalty box for some reason" -- rather than consumers who have habitual credit difficulties. Mr. Bowcott believes the "vast majority" of borrowers who will be attracted to the new loan will, in fact, qualify for the discounted rate and simultaneously improve their credit files with on-time mortgage payments.
Potential downside? Rather than a 30-year fixed rate,you're signing up for an adjustable rate that could increase in future years.