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New loans target immigrants, others with little credit history

PICTURE yourself as a relatively recent immigrant who wants to buy into the American Dream by purchasing a home.

What obstacles and snares stand in your way? No. 1 is likely to be the challenge of accumulating enough cash for a down payment. But a close second is less known: The electronic underwriting systems used by virtually all mortgage lenders penalize applicants who have minimal or no credit histories in the United States and non-traditional household income patterns.

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With little or no credit data on file, you can't generate a credit score. And without a credit score, you often can't even get a rate quote, much less an affordable rate quote. Worse yet, most underwriting systems don't "understand" the cash-based, pooled-resource extended family economics typical of many immigrant households.

But a handful of lending institutions are beginning to develop alternative mortgage concepts designed expressly for immigrant homebuyers -- applicants they'd otherwise reject using score-based underwriting.

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Giant investors Freddie Mac and Fannie Mae have been working on immigrant-friendly loan programs for some time. So have national lenders such as GMAC Mortgage, which last week unveiled a home loan plan that requires no conventional banking or credit history, no credit scores, and dispenses with other traditional requirements as well.

Under GMAC's program, applicants with minimal or no credit histories can substitute other evidence of creditworthiness, such as 12 months of on-time rent payments, utility payments, telephone, insurance and health-care payments.

GMAC's Settle America mortgage program also allows up to 30 percent of an applicant's qualifying income to come from other resident members of the household -- contributions from children, grandparents, in-laws and others in an extended family.

Traditional mortgage underwriting systems expect the homeowner or married co-owners to provide all the income necessary to carry the monthly payments, giving little or no value to income earned by others.

The new GMAC program also is more lenient on down payment cash gifts received by applicants from third-party sources -- communal funds, nonresident family members and the like -- that are commonplace among immigrant households. Plus, it cuts the minimum cash needed for a down payment to $1,000.

"We are going to look at these [applicants] one at a time," and throw computers and credit scores out of the decision-making equation, said Ralph Hall, GMAC Mortgage's chief operating officer, in an interview. In stark contrast with electronic underwriting, he said, "this is totally manual" -- person-to-person, case by case.

To illustrate how the GMAC plan changes the rules of the game -- and the end results -- consider these two actual applications now in process and heading for closing. GMAC supplied the information, minus the identities of the borrowers, to protect their privacy.

The first loan involves a Hispanic immigrant who came to this country about three years ago, and who wants to purchase a home in Virginia. The applicant has "no traditional credit history" whatsoever, $8,000 in family assets, and needs a low-down-payment mortgage to purchase a $160,000 house. The applicant "would have been denied" by GMAC under any of its standard loan programs, according to the firm.

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Using the Settle America underwriting formula, however, the applicant was recently approved for a $151,905 first mortgage at a 5.87 percent fixed rate for 30 years, plus one point (1 percent of the loan amount). Despite virtually nothing on file at credit bureaus, the applicant's on-time rent payment history, electric utility payments and car insurance payments during the past 12 months indicated he was a good credit risk.

The second applicant arrived from Ecuador just two years ago and wants to buy a $180,000 home in Minnesota. He has no credit history on file but has roughly $20,000 in total family cash assets. As with the Virginia applicant, according to GMAC, the lack of credit file data and scores would have ruled out this individual using traditional underwriting methods. He would have been turned down for a loan, no matter what the interest rate or fees.

But after examining his on-time rental payments, the company approved a $174,600 first mortgage at 5.5 percent with no points and a 3 percent down payment. As part of the deal, both the Virginia and Minnesota applicants are participating in homeowner education and debt-management programs.

GMAC's Hall says his firm's experience is that counseling programs produce "a significant boost" in the ability of nontraditional borrowers to handle the monthly payments on a home mortgage.

Though targeted at the special needs of recent immigrants and minorities, GMAC's hands-on credit review program "is available to all persons who qualify, regardless of race or ethnicity," the company said. A borrower must be a permanent resident alien, a legal resident evidenced by a Social Security number, or a U.S. citizen.

Ken Harney's e-mail address is kharney@winstarmail.com.


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