Expert: John Whitehead - 3/4/2004

Question
John,
The following question is one I presented to another expert in this department.Needless to say I was quite disappointed with his short reply containing mostly words I've no idea of their meaning.Example: subprime lenders and  prepayment penalties.
I guess he thought I automatically could derive the meaning of these terms if I was educated in real estate terms which,of course, I am not.I am also on the AllExperts board for landscape design and I would never give this type of vague answer to a questioner. Anyway, I was really looking for a more detailed solution to my question or at least some more tips on dealing with lenders. So once again I go back to the experts. Your next on my list.Thanks.
I have pasted my original question and the answer I received.If you need more time to answer that is fine,because I know how one's time is limited when volunteering on the side.


Volunteer G.E. Yaari Answers       
    


Subject          
Question    Hi. I am also an expert on AllExperts.com. My expertise is in landscape design. From time to time I ask other experts for advice. Your profile was short and to the point,the way I like it.

My husband and I filed for bankruptcy(Chapter 7)and it was finalized with all debts discharged in July 2003. We are still renting a house and have been in the same house for 5 years.The rent is 650.00 per month. We are dieing to get our own place outside city limits. We live in a small university town in Western Kentucky,Murray Ky, home of Murray State University. I am a self employed seasonal(March to November)landscaper. I work now for a couple that are professors at the college and I make pretty good salary when I work throughout the spring,summer and fall. My husband is a painter and works for a local family run business that manufacture customized sidecars,trailers,etc. for motorcycles all over the world.He has a steady income and together we will bring home about 65 to 75,000 this past year.

We got in over our heads because of our debts we had earlier in our marriage. We were young and just starting out and clueless to the perils of financial trouble. We got any loan we could at the beginning because we did not have a credit history.So through bad advice and just plain ignorance we got into debt with finance companies whose interest rates were totally ridiculous and before we knew it we had refinanced over and over,had children blah, blah, blah.
Anyway I filed last year for Chapter 7 and we are finally,hopefully on the right track and I want to do everything correctly now. We were told that we would have to wait at least a year for a home loan and we still may not get a good interest rate until 2 years after bankruptcy. We do have a car loan and a few credit cards that we pay on time and are trying to establish good credit although I know it will take a while. But I'm 41 and my husband is 43 and I am getting nervous about getting somewhere to settle before retirement.
Anyway, we already have a few mortgage companies ready to lend for a home,but I want to get the best deal and am looking for advice on what is good and what is not so good of a deal for us.I would like to be armed with a little knowledge on my options before we get to the table so to speak. If getting a better deal means waiting another year I am resigned to do so.Thanks for any info you can throw my way.
     
Answer    Hi Laura,

Seems to me that you already know what the answer is: with a very recent BK on your credit report, it is impossible to obtain a good loan.

To get a prime loan (best rates) you will have to wait as much as 2.5 years following the BK discharge. Most subprime lenders offer better terms if more than 12 months have passed since the discharge, and since 9 months have already passed, you have an incentive to find from the lenders you've talked to what they will offer 3 months from now.

When talking to subprime lenders, remember that they will offer lower rates if you agree to prepayment penalties.

Best wishes,


Eric  

Answer
Laura,
There is not a lot that I can add to the previous answer.  It may be easier to refer to the loans as "conforming" and "non-conforming" rather than "prime" & sub-prime".  Conforming meaning that the loan conforms to Federal National Mortgage Association (FNMA) aka "FannieMae" guidelines or not.  FNMA required the bankruptcy be discharged 2 years.  The best rates are to be found with conforming loans.  Non-conforming lenders can and do make mortgage loans as early as the next day after the discharge but the rates are higher (depending on your credit score) and the terms are not going to be as good, and they usually attach a penalty for early payment called a "Pre-Payment Penalty" or PPP.  The penalty can be for 1 year up to 5 years and most often is 6 months interest on 80% of the balance.

Current mortgage rates on a 30 year conforming loan are 5.375%.  If you get a non-conforming loan with less than a year since Chap 7 discharge you will probably be asked to put as much as 25% "down-payment" and the interest rate could be up to 12% depending on your credit scores.  Quite a difference.

Hope I have helped even though it may not be the answer you had hoped to hear,
John