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Unconventional borrowing 101

Posted by Rona Fischman March 22, 2012 02:06 PM

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In August 2007, the subprime melt-down was a big topic. Now that the lending industry has tightened up again, I hear potential borrowers being confused about both extremes of borrowing. Some think no one can get a loan with less than 20 percent down. Some think that anything goes, if you know the right lender. Here'ss where we stand in 2012:

Prime Lending Rate is set nationally. It is the base rate of all loans. Residential mortgages rates are higher than that prime lending rate. The subprime residential mortgage rate will be even higher than conforming residential mortgage rate. This is reasonable, because non-conforming lenders are taking more risk.

The opposite of "subprime mortgage" is not "prime mortgage"; it's a "conforming" mortgage. To get a conforming (or conventional) loan, borrowers must conform to rigid standards developed by mortgage underwriters at FNMA or FDMC, the two big national mortgage companies. Non-conforming loans do not conform to those standards. There are local banks and credit unions that hold their loans. They are non-conforming, but usually called "portfolio lenders."

Conforming loan standards are not exact; there is some judgment involved. Since the meltdown, room for judgment is pretty small. An applicant is judged on these factors: income to support the requested mortgage plus all other outstanding debt, credit history, job stability, and assets. It was possible, in 2007, for someone with an unsteady job to still get a mortgage if he/she had a good credit history, a good income, and a hefty down payment. Likewise, someone with no down payment could get a prime mortgage if his or her job is stable and credit is excellent. Someone with a lot of debt, but good credit and income could get one. Those days are over.

Now, conforming loan standards are pretty standard. Your financial health will be checked, thoroughly, when you apply for a mortgage. If you don't have 20 percent down, you can still get a conforming mortgage, but you will be checked even more as you try to qualify for PMI (insurance for the lender on potential equity loss because you are borrowing more than 80 percent of the price.)

Non-conforming mortgages may have higher interest rates. You can find them at local banks that hold their own mortgages. There, you may find Adjustable Rate Mortgages that will go up in 2 or 3 years. They can also have higher up-front costs added into the debt. Some are a significantly more expensive way to borrow money. Some are close to market rate. You have to shop around.

If you do not qualify for a conforming loan, it should be a warning sign. If the lender's actuaries think you are a risky borrower, you may be. Check with another lender. If multiple lenders are tell you that you should not borrowing money, maybe you shouldn't.

The trouble began in the 00s when subprime lenders made it possible for almost anyone could borrow anything, for a price. It is a good thing that those days are over.

This blog is not written or edited by or the Boston Globe.
The author is solely responsible for the content.

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Scott Van Voorhis is a freelance writer who specializes in real estate and business issues.

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