| Mortgages for people with flawed credit have
evolved over the years, and now each loan is virtually a customized
mix of rates and fees.
The industry term for a mortgage for a customer
with imperfect credit is "subprime" or sometimes
"non-prime." But if you're a subprime customer,
you won't hear the term unless your broker or loan officer
is a terrible salesman. Instead, the mortgage will be called
specialty financing or a loan for someone with flawed or less-than-perfect
"They're going to point out in a professional, customer
service-friendly manner that your credit is not pristine and
they have programs for you," says Greg Lumsden, senior
managing director of Full Spectrum Lending, a Countrywide subsidiary.
Whatever the terminology, the most important
advice to give to subprime customers is to shop around when
getting a mortgage, because rates and fees can vary a lot
Don't be ashamed, shop!
Many subprime borrowers are reluctant to shop multiple lenders
because they don't want to face a bunch of loan officers and
explain time after time why they have made late payments. But
they shouldn't sweat it, say mortgage bankers -- lots of borrowers
have credit problems.
"They shouldn't be ashamed by their credit situation,
and I think they'll find that there are more and more lenders
out there who will give them loans, and they don't have to
get a loan from one of the unscrupulous lenders out there,"
says Frank Sillman, executive vice president of Indymac Bank.
There are many legitimate subprime lenders.
Among them are some of the biggest names in the business,
such as Countrywide, Washington Mutual and National City.
They have the experience and resources to analyze mind-boggling
amounts of information in gigantic databases. That's what
allows them to offer a set of rates and fees tailored to each
subprime customer in a process called risk-based pricing.
The evolution of subprime mortgages
It wasn't always this way. Until usury laws were relaxed in
the late 1980s, there wasn't much of a subprime market because
lenders couldn't charge rates that were high enough to compensate
them for the risk. Subprime was the realm of finance companies
and "hard money" lenders.
The next stage began in 1994, when subprime
loans began to be securitized -- bundled together and sold
as investments. This required lenders to use credit scores
to categorize borrowers. They developed an industry shorthand
in which subprime customers were denoted by letter grade,
as if they were in school: Someone with a credit score of
620 or higher got an A; just below that was A-minus, followed
by the riskier B borrower; a C borrower was riskier still,
and a D client was really shaky.