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Bad credit? No credit? No sweat. Buy that house!

Fannie Mae and the National Foundation for Consumer Credit are organizing a plan that gives consumers who have had previous credit problems the chance for homeownership.  The two groups say that if you're enrolled in an "approved debt management program with intensive counseling," you can have the opportunity to become a homeowner through Fannie Mae-approved lenders in 13 metropolitan areas.

"It's a new thing for both groups -- for Fannie Mae and for our NFCC clients, which are Consumer Credit Counseling Service offices across the nation," explains Cora Fulmore, NFCC director of housing. "We're trying to make sure that we make as many programs available to our customers as possible, to share with people once they've paid off their debts."

The plan is only open to borrowers who have had financial difficulties in repaying debts due to a situation over which they had no control, adds Julie Gould, Fannie Mae's vice president for community lending. Situations such as divorce, job loss, death or medical emergency are typical scenarios.

The requirements

Eligible borrowers must have been in a CCCS Debt Management Plan for a minimum of 18 months and have no more than 18 months remaining.   Previously, these consumers would not have been considered for a Fannie Mae loan unless two or three years of creditworthy history had passed, Gould adds.

The experiment is also open to borrowers who have graduated from a participating CCCS Debt Management Plan in the past 12 months.

"This will help Fannie Mae determine if intensive counseling can help borrowers take on the additional responsibilities of homeownership after an isolated financial setback that occurred through no fault of their own," Gould says in a prepared statement.

"With Fannie Mae working with our credit counseling clients, they won't have to wait that two-year period for a loan," Fulmore states. "And the advantage to Fannie Mae is that they won't have to portfolio those loans. They can sell these on the secondary market."

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There are some disqualifying factors, however.  The borrower cannot have declared bankruptcy and must have continued to make his or her mortgage or rental payments as agreed on a timely basis. During the Debt Management Plan period, the borrowers must not have had any late payments.

In an effort to make the credit repayment process less painful, Fulmore says CCCS offices are conducting telephone interviews.

"The consumer can call us and give us all the information we need to set up a Debt Management Plan initially, without having to leave work and come down to our offices," Fulmore states. "That is a real inconvenience for many people, and if they can just use their lunch hour to call in the necessary information, it saves time."

Consumers who have graduated from CCCS counseling courses are "good credit risks," Fulmore adds.  "They chose, instead of filing bankruptcy, to pay off their debts.  We hope to show Fannie Mae that our clients are good risks and the performance on these loans will not be any different from that of any other loans to individuals who have gone through credit problems."

The typical profile of a consumer going through the Debt Management Plan is a person who has an unforeseen reduction in income, but they have enough money coming in to take care of their basic living expenses and the prorated payments that CCCS sets up with the participating creditors.

"Because most of our clients have gone through a period of adjustment, they know how to manage a budget," Fulmore says. "They have had to manage their obligations and abide by a structured budget that has been set up for them. They have learned how to maintain obligations and for that reason alone, this program should be a success."

CCCS clients are grateful for the chance to prove themselves, she adds, because they have been given a second chance to re-establish themselves as creditworthy.

"There is a big misunderstanding out there about what debt management programs such as ours are," Fulmore says. "It is not at all similar to a bankruptcy. Our clients are taking the responsibility to pay off debts and honor their obligations. They should be commended for their actions."

Loans available under the experiment include Fannie Mae's Fannie 97 or 3/2 Option loans.   The Fannie 97 loan is basically a low-downpayment program for people with excellent credit but little savings, explains Alfred E. King, a Fannie Mae spokesman.  It allows the consumer to make the downpayment from an unsecured loan, such as a credit card or a grant, or even a loan from a relative.  These are options not typically available from most mortgage lenders.

The 3/2 Option Loan is a 5 percent downpayment loan, which requires that 3 percent come from the borrower's own funds and 2 percent from a grant or gift.

Both loans require standard underwriting criteria and borrowers must have two months of mortgage payments in reserves.

All borrowers also are required to participate in monthly credit and budget counseling as part of the Debt Management Plan and must complete a four-hour comprehensive pre-purchase home buyer education course. After the home is purchased, another 12 months of post-purchase counseling must take place.

NFCC member offices (usually called CCCS offices) that will participate include those in these cities: Atlanta, Ga.; Buffalo, N.Y.; Cleveland and Columbus, Ohio; Denver, Colo.; Gary and Indianapolis, Ind.; Los Angeles and Santa Clara, Calif.; Miami, Fla.; Phoenix, Ariz. and San Antonio, Texas.

Lenders that will originate loans under the program include CitFed Mortgage Corporation of America; GMAC Mortgage; Huntington Bankshares; Indiana Housing Finance Authority working with Leader Mortgage; NationsBank; SunTrust Bank and Wachovia Bank.

To find the location of a NFCC agency close to you, call the national referral line at (800) 388-2227. Local CCCS offices also can identify other local lenders that are in the process of joining the program.

Can a debt management program really help?

Before someone can become creditworthy to a mortgage lender or apply to the Fannie Mae program, they are required to go through a Debt Management Plan.

But how can it help?

Martha Webster, director of housing at the local tri-county office of CCCS in West Palm Beach, gave us the scoop.

The Debt Management Plan allows you to consolidate and repay your debt -- so, when CCCS counsels you, they will go through your budget and your credit.  If you're in the market for a new home and have blemished credit, CCCS can help you clear it up.

Typically, you will pay back your debts on a 36-month plan, but that is often extended to 48-months if you need more time to repay.  The program allows you to work out a budget plan, in this case, with a one-time contribution of $20 and a $4 monthly fee for mailing and processing of the bills.  The charges differ from CCCS office to CCCS office, but the program is the same.

In order to be accepted into the Fannie Mae program, Fannie Mae requires a four-hour prepurchase course, based on the course outline in Fannie Mae's workbook called "The Guide to Homeownership."

That course teaches budgeting strategies and explains how credit affects ability to buy a home. You'll learn things such as how to avoid racking up a great deal of debt before you purchase a home and how to get copies of credit reports.

In addition, the prepurchase course covers these topics:

  • How to increase income by rearranging budget and decreasing debt
  • How much house can you afford?
  • Shopping for a home, with strategies
  • Closing procedures (usually handled by volunteer lenders who guest-host classes to teach the basics of understanding closing documents)
  • Closing costs, such as costs of documentary stamps, insurance, appraisals, credit reports
  • How to homestead your taxes
  • How to budget to handle all mortgage costs, including taxes and closing fees

A third Fannie Mae requirement under the new experimental program is a 12-month post-purchase program. In Palm Beach County, this program is conducted in conjunction with the University of Florida Cooperative Extension Service. The topics covered vary widely, but often include:

  • Pertinent consumer information to be aware of after you purchase a home, i.e. scams to watch for such as companies selling siding and lawn maintenance or satellite dishes and water softeners
  • Home security issues
  • Landscaping your home
  • Maintaining your home and keeping up your property value
  • Sticking to a budget

"There's a lot of good information presented to homeowners in the post-purchase programs, but unfortunately, people are working so much to pay for their new house, they find it difficult to attend these classes sometimes," Webster says. "Ours is a voluntary program and it's hard to get people to attend on a regular basis over 12 months."

Posted: April 29, 1998


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