RateWatch #146 - B-Paper LoansMay 8, 1999
by Dick Lepre
Loans for People With Credit Problems
Almost all of the content of the Homeowners.com WWW site, our commentary and RateWatch newsletters, deals with what in the mortgage industry are called "A paper" loans. "A paper" means good credit.
Good credit is attained with a credit score of 680. It may be had with a credit score of as low as 640 with mitigating circumstances.
Just below A paper is A- paper. A good credit history with a high debt ratio. As credit lates, collections, mortgage lates, judgments and tax liens start piling up credit deteriorates to B, C, or D.
These are some of the things that make for really bad credit: 1) bankruptcy in the last 4 years 2) foreclosure or Notice of Default 3) persistent 30 day mortgage lates 4) 60-day (or more) mortgage lates 5) persistent revolving credit lates.
What Makes the Grades?
The worse your credit history the higher rate you will pay. Lenders have rules as to what constitutes B, C or D credit but, from my perspective, grading is like calling balls and strikes in baseball. Grading will depend on your credit history, ratios and loan-to-value ratio. The way to approach this is to fill out an online application, let us get your credit report and fax it to several lenders for grading. They are going to call the balls and strikes so let them do it. One difference is that we have several lenders so you won't get penalized if one umpire blinks.
"B paper" loans are subjected to tougher looks at the appraisals. This makes sense because "B paper" borrowers are going to be more likely to get behind in their payments and the lender is more inclined to think about the possibility of foreclosure. B-paper appraisals, once reviewed, are more likely to have their value cut. Be prepared for the possibility of seeing 5% "disappear" off the top of your appraisal.
What Kind of a Loan Do You Get?
Put it this way: you are not going to start bragging about your rate. B-paper loans are to bail you out of emergencies. They usually involve "cash out" to cover debt or liens. If you are getting a B-paper loan it is likely to be an ARM with a high margin. The following is what I usually suggest: get a loan fixed for 3 years. It will usually have a prepayment penalty. Stick with it for 3 years and keep absolutely perfect credit for those 3 years. Then refinance it with an A-paper loan. A B-paper loan is not a "keeper."
I suggest the following procedure for these loans: fill out an application, let us get your credit report, we will send it to be rated and convey the results to you. This will give you an idea of what rate you will get. If you can live with that for 3 years you then get an appraisal. Not until we have an appraisal that passes muster with the lender will you know exactly what rate you will get.
With B-paper loans we consider our job as "arguing your case" regarding credit rating. This is going to make a big difference in your payment and we can help make your case by shopping your loan to several lenders.
Investors had developed a fondness for B-paper loans because of the high yield. During 1998 we had the beginnings of liquidity crisis. Investors were concerned about risk just when LTCM was saved by the Feds. The B-paper market almost disappeared overnight. It has made a comeback.
If you have serious credit problems, recognize them and realize that there are solutions. Do not let debt cause your mortgage to become late, do not let mortgage lates cascade to notice of default. Do not be concerned about being in an embarrassing situation. B-paper loans are often salvation. Getting a B-paper loan is like going to the emergency room on a sunny Saturday morning. It may not be your first choice of things to do but it beats sitting at home and bleeding to death.