Non-Conforming Mortgages

How many times as a Realtor, have you been told by a prospect that they have past credit problems that prevent them from applying for a mortgage? They have money for a down payment, are motivated to buy, but their bank told them they should clean up their credit and wait a year before purchasing. Now, there may be a solution to facilitate a sale and open a larger pool of buyers for your listings—a "band aid" mortgage to assist a buyer who is trying to overcome a past situation.

Once called "Hard Money" or "B Paper," Non-Conforming mortgages may be a creative way to help the buyer who will not qualify for a conventional mortgage. The reasons may vary from credit problems (bankruptcy, mortgage rates, slow credit payments, and charge offs), high debt ratios, non-conforming zoning, or the need for no income verification. In most situations, if the buyer has at least 10% of their own funds for a down payment, they could receive financing to purchase a home. As a bonus to the potential buyer and Realtor, some lenders will provide Pre-approvals.

The buyer’s mortgage will be graded based on their credit report and debt ratio. The grades typically range from "A-" through "D." A buyer with the "A-" credit may purchase with only 10% down while the "D" buyer will need 35%. For example: A "D" buyer with 10% of their own funds would need to come up with the remaining 25%. The additional down payment may be from a gift, a second mortgage, or a seller’s second mortgage.

A seller providing a second mortgage to facilitate a sale is not uncommon. It is a win-win for both sides of the transaction. The benefits to the seller include having their home finally sold and an income stream from the second mortgage payments. For the buyers the benefits are finally owning a home and improving their credit rating.

Rates for non-conforming mortgages will vary depending on the credit and debt ratio grade and terms (Fixed or ARM). Although the rates are higher than conventional mortgages, the average loan payment is only $100-$200 more than a conventional mortgage. Once in their new home, if the buyer pays the mortgage on time and keeps the rest of their credit account current, they may be able to refinance into a conventional loan within 12 to 24 months.

Richard Shapiro is a Loan Officer at Assurance Mortgage Corporation of America’s Westborough, Mass. branch office. He may be reached at 508-836-9800. AMCA is a Direct Lender—Seller/Servicer.