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 characterize 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) referred 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 was important to consider pre-payment
penalties and make sure that if one existed it did not exceed the 2-3 year
period.
As more flexible, automated underwriting guidelines were introduced, lenders
were encouraged to first try to acquire a "conforming" loan. If it
was determined that a borrower was unable to acquire a conforming type loan, they
were supposed to be 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 the
borrower proceeded to a niche type loan the lender hopefully always tried to
obtain the best possible loan option for the borrower.
More conservative lenders 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. Too often borrowers were not adequately advised regarding whether
they would be in a position to refinance at the conclusion of their initial
loan period or that they would 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 have 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