Mortgage bargains possible in 'risky' cases


KEY WEST, Fla. -- You may have been late on your mortgage payment a couple of times in the past year. Missed a credit card payment. And your current personal debt load may be heavy.

So what kind of rates and fees could you qualify for in 1996 if you wanted to refinance, or purchase a new home?

For starters, you know you're not a cream puff applicant. You know you've got blemishes. But do those imperfections necessarily mean that lenders will reject you as an applicant, or hit you with rates and fees far above what you'd pay if you were a platinum-grade prospect?

In past years, yes. But this year not necessarily. Thanks to new statistical analysis techniques that allow lenders to "see through" your surface credit problems, 1996 could be your year. Despite your late-payment peccadilloes and your high debt load, you might just qualify for near-cream-puff rates and terms.

Precisely how this all works was one of the key themes recently at a meeting of the nation's top lenders who specialize in loans to so-called sub-prime credit ("B" and "C") home mortgage applicants. This segment of the overall market has boomed in the past 12 months -- the direct result of widespread corporate downsizing and exceptionally heavy use of credit card debt by consumers across the country.

To help mortgage lenders assess how risky applicants are, experts are devising analytical tools and tests that focus on everything from credit bureau scores to the true market value of the applicant's house. The most potentially far-reaching is a new grading system jointly developed by Standard & Poor's and Freddie Mac -- the Federal Home Loan Mortgage Corp.

The system combines Freddie Mac's computerized underwriting technology with Standard & Poor's mortgage foreclosure risk assessment models to allow a lender to understand borrowers more thoroughly.

Most importantly, the system searches for key compensating factors that reveal pluses hidden among the minuses.

Say, for example, that you outwardly fit the standard definition of not-quite-prime used by most lenders: You've been late as much as 60 days in the past 12 months on a charge account debt. Your mortgage was 30 days late several months ago. And your debt-to-household income ratio is 44 percent -- well above the 33 percent to 38 percent maximums preferred for conventional loans.

Some lenders would define you as a "B" credit and charge you higher fees at application, along with a rate on your mortgage that might be 2 percentage points higher than the best available. Other lenders might define you as a "B-minus" or "C" applicant, and charge you two to four extra "points" at closing.

A lender using the new Freddie Mac/Standard & Poor's analytical system, however, might see your application to refinance very differently: Solid, steady income. Longtime employment at the same firm. A loan-to-value ratio of 70 percent -- giving the lender plenty of equity cushion to fall back on in the event of a foreclosure sale.

Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.

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