Sub-prime loans are designed for those applicants whom do not meet
conforming loan guidelines. Each Investor has their own specific guidelines
for sub-prime loans. Sub-prime loans are graded from A+ to D depending
on certain criteria such as:
Mortgage or Housing history
Credit Score
Revolving and installment late payments
Major adverse credit (Collections, Judgements, Charge Offs)
Years since Bankruptcy or Foreclosure
Debt to income ratio
The rate, maximum LTV, and other loan options such as seller concessions and CLTV are specific to the particular borrower’s grade.
Some sub-prime programs allow for a blended grade based on the borrowers credit score and mortgage history.
An example is if the credit score is graded a “B” and the borrower’s
Mortgage history is graded an A+, you could blend the grade up one level to
an A-. This would give the borrower a higher loan to value option as well as a
better rate. Not all bad credit or sub-prime programs allow for this so you need to check
the lender’s specific program guidelines that you are using.
Lease Options to Purchase / Seller Financing Conversions
A lease with an option to purchase is essentially a “rental” property
that has a purchase option for the renter after a pre-specified time period.
Seller financing is also referred to as a “private mortgage” in the industry,
and is the situation that exists when the seller carries all of the financing
for the borrower on a home purchase. At some point in time the borrowers will
need to convert these lease options or private mortgages, and obtain
financing in their own name.
When converting these types of programs into a mortgage that is held
by your borrower, there are several key points to remember:
1. The verification of rent or verification of mortgage will not suffice in
and of itself. Your borrower will need to provide cancelled checks for
at least 12 months (or for the time period that they have lived in the
home) to adequately prove the repayment history on the account.
2. If your borrower is not on title to the home (which is extremely
common), most lenders will tend to look at the transaction as a
purchase. There are ways to structure these deals so that a lender will
treat them as a refinance, noted as follows:
a. To have a private mortgage be considered a refinance
transaction, the borrower must typically be vested in title and
you must provide a copy of the initial purchase contract in
addition to the cancelled checks to support repayment history.
b. For a lease option to be considered anything other than a
purchase money transaction, the borrower will need to have
exercised the option to purchase and have been vested on title at
that point. You must supply documentation of the exercised
option to purchase along with a copy of the initial lease option,
in addition to the cancelled checks.
3. If you are unable to provide sufficient documentation for the
transaction to be considered a refinance, normal purchase money rules
for minimum down payment are generally followed. The one
exception is when a lease option to purchase includes a provision for
part of the monthly lease payment to be contributed toward the
eventual down payment. This monthly portion must be a reasonable
percentage of the total monthly lease payment—or you will have
issues with the lender.
