By Ray Brousseau
View these articles and more at
“Seeing Recovery Down the FHA Path,”
“Venture Out of the Credit Box,”
“Weaving Your Way Through
What’s Next for the Industry,”
<< Alternative continued from Page 94 “Many borrowers today are creditworthy
potential homeowners who just can’t find
the right financing.”
borrowers, but are only available to eligible U.S. service members, veterans, some reservists and National
Guard members and surviving spouses of military
members. Although this limits the borrower pool,
those eligible for these loans can enjoy no-downpay-ment loans with no mortgage insurance. The VA also
does not set a minimum credit score, but like FHA
loans, many lenders do. The average FICO score for
closed VA purchase loans this past April was 707, with
an LTV of 98 percent, according to Ellie Mae.
USDA loans also offer the benefit of no-downpayment programs, but no military service is
required. Often, people think because the programs
are under the USDA umbrella, the loans are only for
farms. That is not the case. The USDA Rural Development office provides loan programs for homes in
qualified rural areas throughout the U.S.
Aimed at low- or moderate-income borrowers, the
USDA offers two main programs for homebuyers. The
Section 502 Direct Loan program is focused on low-and very-low-income applicants and provides payment
assistance for qualified borrowers. The program has
a zero-downpayment option. The Guaranteed Home
Loan program is for moderate- or low-income borrowers to purchase or rehabilitate a home. Although
neither program has credit-score minimums, many
lenders will only issue loans to borrowers who meet
their FICO-score requirements.
Mortgage professionals who want to start working
with these loans or to increase the number of government loans they originate should learn the credit
requirements of their lending partners, as well as seek
additional partners that may be particularly experienced with these types of loans.
While government loans are an excellent alternative
to conventional mortgages for many borrowers, the
requirements to qualify for these loans and loan programs are very specific and eliminate many potential
Despite what the particular numbers might indicate, these borrowers often would successfully sustain
homeownership and present minimal risk to lenders.
Since the Great Recession, many lenders have been
incredibly risk averse, and mortgage credit has been
tight. Borrowers with lower credit scores or higher
debt-to-income ratios have been all but locked out
of the market. Some lenders are now recognizing this
segment of potential homebuyers, however, and have
begun offering nonprime mortgage products that
offer the flexibility to underwrite to the specific borrower, not just the raw numbers.
In 2017, 21.2 percent of the U.S. population had a
credit score below 600, according to Experian’s State of
Credit survey. Sixty-nine percent of all closed loans this
past April had a FICO score of 700 or higher, according
to Ellie Mae. This is leaving a huge swath of the market
unaccounted for and represents significant opportunities for mortgage originators and lenders that can
work within this space responsibly.
Some lenders are responding to this rising demand
with loan products that seek to balance risk in their
underwriting. With nonprime mortgage products,
manual underwriting is key to responsible lending,
and originators should look for lenders that not only
look at each borrower as an individual, but also lend-
ers that back their underwriting with strong, high-
If a borrower is looking for a mortgage but has a low
credit score, for instance, lenders working in the non-prime space will likely balance that risk by requiring a
higher downpayment and more cash reserves. Some
nonprime products allow credit scores as low as 500.
By looking at the borrower closely through manual
underwriting, lenders and originators are able to dis-
tinguish between individuals who make consistently
late payments (creating a lower credit score), and those
who had one bad credit event — and subsequently
have a lower credit score. Nonprime loans also can be
an option for borrowers who are not conventionally
employed, such as those who own their own small
business or are self-employed as freelancers or contrac-
tors. Responsible lenders in this sphere will want full
documentation, so prepare borrowers for this reality.
Nonprime products can be for either purchase
or refinance, and credit and downpayment requirements will vary from lender to lender — and likely from
borrower to borrower, as well, if manual underwriting
is the norm. Originators should be aware of nonprime
products as they come to market and be prepared to
help their clients secure the mortgage they may have
previously thought was unattainable.
Another nonconventional mortgage product is the
jumbo loan. Although borrowers who need jumbo
mortgages often have strong credit profiles, they still
are not considered conventional borrowers. A jumbo
loan is any loan that exceeds the maximum conform-ing-loan limits set by the Federal Housing Finance
Agency (FHFA) for Fannie Mae and Freddie Mac.
For this year, the limit is $453, 100 for most of the
U.S. and $679,650 for certain high-cost areas, such as
Alaska and Hawaii. Although the loans themselves
fall outside the conventional-lending umbrella, often
jumbo borrowers would fit into conventional-lending
criteria except for the high cost of the homes they are
purchasing. Because they fall outside of conventional-lending standards, jumbo loans often have higher
interest rates, require larger downpayments, and
entail stricter underwriting rules.
These loans can have 15- or 30-year terms and can be
fixed or adjustable rate. Credit-profile and downpayment requirements vary by lender and loan amount.
Originators should look for lending partners that offer
a variety of loan products for their jumbo customers so
they can ensure that clients get the best mortgage for
their particular financial situation.
n n n
Although conventional lending has a large market
share, mortgage originators need to look for alternatives if they want to increase their business and widen
their customer base. Many borrowers today are credit-worthy potential homeowners who just can’t find the
By educating themselves on all that is possible for
borrowers today and partnering with lenders that
offer a wide range of flexible mortgage products,
mortgage professionals can help more clients become
responsible homeowners and, in the process, close
more loans. n