One of the biggest changes in the real estate market over the past five years has been how home buyers with poor credit are perceived.

Years ago, conventional mortgage lenders wouldn’t touch a borrower who didn’t have perfect credit, leaving A-, B and C borrowers no where to go but to lenders who offered a home loan at an interest rate so high it was like buying a house on a credit card.

But watching legions of less than perfect borrowers turn into stable, mortgage-paying homeowners has taught lenders to broaden their thinking when it comes to credit problems and home loans.

The thriving economy has given lenders the opportunity to reach out to these prospective borrowers with new, custom-tailored loan programs designed to reward homeowners who pay on time, or help folks restructure their financial lives.

But one of the biggest mistakes lenders make is to treat all home buyers’ credit problems the same way, regardless of what caused the problem to begin with, explains Paul Abbamonto, president of Full Spectrum Lending, a division of Countrywide Credit, which also owns Countrywide Home Loans.

Some borrowers habitually pay late, even if they have the cash in their accounts to pay on time. Others have what Abbamonto calls “a life event,” including death, divorce, disability, or a lost job, and need a few years to recover financially.

And once you have B/C borrowers locked into a loan, they don’t all act the same way. Those who have experienced a life event may end up refinancing their loan after 2 years. Those who habitually pay late may start shopping for a better deal within 24 to 36 months.

Either way, Abbamonto says B/C loans, which can be highly profitable, tend to be refinanced sooner than conventional loans.

Abbamonto said the company began creating various loan programs to help borrowers deal with their individual credit problems and the causes behind them. Abbamonto also hopes these programs will keep borrowers in their loans a little longer.

Full Spectrum Mortgage’s “Credit Comeback” loan is designed for borrowers who have habitually poor payment records and seem to need an incentive to make their payments on time.

“Once you close on the loan, the interest rate will never go up,” explained Abbamonto. “However, if you make your payment on time, for one year, your interest rate will automatically drop 3/8 of a percentage point.”

Each year that you make your payments on time, the rate will drop another 3/8 of a point for a total of four years, Abbamonto said. If you miss a payment, but get back on the bandwagon, the interest rate will drop after another 12 months of on time payments.

At press time, interest rates for the Credit Comeback program range from just over 9 percent (for borrowers who have just missed Grade A) to around 13 percent for borrowers with more serious credit problems.

But with perfect payments, the 9 percent borrower could see his or her interest rate fall to 7.5 percent, no matter where interest rates are at the time. The borrower with a 13 percent interest could see that fall to 11.5 percent.

Again, the rate never goes up, even if you fall back into your old pay-late habit.

For borrowers who are experiencing a life event and need two years to turn their financial lives around, Full Spectrum mortgage offers a 2-year fixed-rate loan that currently runs around 12 percent. At the end of the second year, the loan converts in a 1-year adjustable rate mortgage (ARM).

This loan helps consumers refinance their home and use the proceeds to pay off all of their other debt, such as credit cards, school loans and car loans.

“During the life event, this consumer probably lived on his or her credit cards, and ran up their line of credit to get through it. What we try to do is lower their total monthly payments and get them on their feet,” Abbamonto explains.

“The idea is if these folks pay the way they used to, they can come back to Countrywide Home Loans after two years, and apply for a conventional loan,” he added.

“If there are 67 million homeowners, approximately 90 percent of them will have good or great credit, and qualify for Grade A loans. But 10 percent, or nearly 7 million homeowners, plus another 3 million renters, have credit problems,” noted Abbamonto. “And, a large portion of that world has been under-served.”

“The good news in my business is that we can look at each customer individually. While these loans are normally at 90 percent loan-to-value (LTV), we can make an exception and do a 95 percent loan or be flexible in other ways,” he added.

Published: Jan 24, 2000