NICHE FINANCING FOR THE CREDIT
CHALLENGED NOT SO AVAILABLE TODAY
Lending to the borrower with "less than perfect credit" or who may
have a special circumstance had become a very important "niche" in
the real estate. There have always been "hard money" or
"equity" lenders available but these sources have been traditionally
used only in desperate situations. The rates, fees and pre-payment penalties
made these loans a "last resort" effort.
Lenders developed what they called portfolio or niche loan products
available to accommodate the borrower who needed special attention. While these
loans may have had better rates and fees than the old hard money alternatives,
there were some things to characterized this type of
financing:
- It was more expensive in rate and, often, in fees than the more
conventional loan.
- The grades (Ax, A-, B+, B, C, D) refered
to seriousness of the credit blemishes resulting in the lenders
"risk" factor.
- The more serious the credit blemishes, the lower the
Loan-to-Value (LTV) was likely to be.
- Higher qualifying ratios usually required lower LTV's.
When counseling a potential borrower, loan officers considered this kind of
financing as "short term". It required that a "plan of
action" be prepared so that the borrower could presumably refinance into a
less costly loan within 2-3 years. It is important to consider pre-payment
penalties and make sure that if one existed it did not exceed the 2-3 year
period.
With today's more flexible, automated underwriting guidelines, we always tried
first to acquire a "conforming" loan. If we determine quickly that we
were unable to acquire a conforming type loan, we counseled very carefully
regarding the risks involved with a niche loan. It was difficult to know
exactly what loan would be obtainable for a borrower with very blemished
credit. The loan package was typically submitted seeking the highest (Ax or A-)
grade rating. Often, an investor determined the actual loan to be
"offered" to the borrower only after reviewing the entire package.
This was viewed as a "counter offer" for the borrower to either
accept or reject. By carefully
preparing the package, fully explaining credit difficulties and anticipating
possible questions/problems in the file, if we proceeded to a niche type loan
we always tried to obtain the best possible loan option for the borrower.
In most instances, we counseled the borrower to improve their credit,
acquire additional down payment funds or to improve their loan profile
sufficiently to obtain more conventional financing. The bulk of the niche
financing loans were fixed only for those first 2 or 3 years and were designed
to change to adjustable rate loans with substantially higher rates and
payments. We were concerned that borrowers would not be in a position to
refinance at the conclusion of their initial loan period and that they would
not be able to afford the future adjustments to their payments. As it turned
out, that is exactly what happened and many niche loan borrowers are now facing
serious problems. In retrospect, we are pleased to say that we simply refused
to make such loans and our past borrowers are not among those facing
foreclosure.
Most lenders, including Humboldt Home Loans, were "full service" to
the extent that they had some form of niche products. Thus, if a borrower did
not quite meet the criteria for an A paper loan, they need not go elsewhere and
start the process all over again to obtain some form of financing. The niche
product should had always been a very last alternative
approach to funding a loan and not automatically the first option. Too
frequently, that was not the case for many lenders and the current housing
crisis is a result. Again, Humboldt Home Loans is proud not to have been a
party to putting people into loans that they could not afford.
There are still many good loan options available for borrowers and it can
require "research" to determine the appropriate loan for a particular
borrower's needs. If you feel you may require some special counsel in
preparation for home financing, call Humboldt Home Loans today for a FREE
consultation interview. We will help you explore all of your loan options.
Webpage/niche financing