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New Subprime Guidelines for Lower Credit Score Borrowers
Mortgage News > New Subprime Guidelines for Lower Credit Score Borrowers
Low credit scores are now more common than anyone cares to admit and no longer reflect irresponsibility, but rather individuals who were caught in the middle of our country’s worst recession ever. The plummet in our nation’s economy caused millions to lose their jobs, their homes, and their respectable credit.
Many in the lending industry can see that, and are fighting for the now unmentionable “subprime” loan to be restructured in a way to avoid negligent lending while still providing those aggressively rebuilding their lives the opportunity to once again own a home.
Brian T. Moynihan, chief executive of Bank of America, spoke at a Brookings Institution housing forum last month where the Los Angeles Times reported him as saying "There are very real concerns that a too-high standard can lock some people out of homeownership — something we don't want." Moyninhan went on to say "How do we make credit available but protect people from taking on too much risk and ending up in a home they can't afford? And how do we strike the right balance between prudent underwriting, responsible down payments and access to homeownership?"
A “dignity mortgage”, aka subprime loan, is being proposed in an effort to help those trying to rebuild their lives, their credit and our nation's economy.
A less than perfect borrower would still be expected to lock in a higher rate (maybe an additional 1.25% than the going rate). The terms of the dignity mortgage loan would change after five years if the borrower made consecutively on time payments. After the five years of timely payments the subprime rate could then be adjusted to whatever the current “excellent” credit score and 20% down borrowers are receiving for their loans.
No one would be allowed to merely state their income instead of providing pay stubs and tax returns. No 100% financing and borrowers would be required to put down at least 10% to get a loan.
Dignity mortgage borrowers would be required to have incomes no higher than 120% of the regional poverty level, and must undergo extensive financial counseling in an effort to ensure they could afford the home, even in the case of a temporary illness or job loss. They would be allowed to purchase only homes selling for 95% or less of the median price for the region.