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Success with Subprime
by Brian
Sacks
Do you have a question for Mr. Sacks? E-mail
it to brian@loanofficersuccess.com.
Click here
for more articles by Mr. Sacks.
How to Work with Buyers who have had a Bankruptcy or Other
Credit Issues
(First in a series of four articles)
If a person is in the position of considering filing for bankruptcy, that person's
credit is probably already ruined! The person can't pay his or her debts, is behind on many payments, and/or doesn't
have enough assets to cover the debts. So it's not the bankruptcy that "ruins" a person's creditworthiness;
it's the situation that warrants the bankruptcy that's the problem. A bankruptcy isn't a positive thing, however.
Information about a bankruptcy usually stays on a person's credit report for ten years. And a person must wait
at least six years from the date of discharge before filing another bankruptcy.
So, why would you want to work with a person who has filed for bankruptcy? An example can make that clearer.
When I started my company, I decided to specialize in helping folks with a bankruptcy or foreclosure buy a home
with very little down payment and without paying double-digit interest rates. When people heard what I wanted to
do they were saying to me, "You're crazy. Why would you want to take these high-risk people and lend them
money with not a lot of money down - in other words, without a lot of equity - and you're not really charging them
high rates and points." (High risk equates to high rates in most money-lending situations.)
Here's what I told them:
Suppose you have two people, Person A and Person B. Person A filed bankruptcy a year ago because he was injured
at work, did not receive worker's compensation for quite some time, and had bills he couldn't pay because he had
no money coming in. He had not mismanaged money. The bankruptcy was the result of an extenuating circumstance that
was beyond his control. However, his credit score in only 530. Now he comes to me and says he wants a mortgage.
Next let's look at Person B. He and his wife each make $40,000 a year. They have a 700 credit score and perfect
employment histories. They also owe everybody everything. They have ten credit cards "maxed out." They
have just enough money to get into the house they want with nothing left over. Here's what can happen. One of them
can lose his or her job. Because they have no savings and lots of debt, at that point they are candidates for a
bankruptcy.
So, while the entire world views Person A as a high credit risk, it's actually Person B who is probably the bigger
risk. Person A has no bills, no debt, and can't file for bankruptcy for the next six years. Person B, on the other
hand, has lots of debts and could end up having to file for bankruptcy six months from now if he and/or his wife
have any adverse financial event in their lives.
Working with buyers who have had a bankruptcy is one of the most misunderstood areas of loan origination.
In order to be successful with these clients you must know:
- Bankruptcy law
- FHA/VA/Conventional/Sub-prime guidelines
- The buyer's psychology - how do you get information you need from the buyer who does not want to relive their
painful past problems
- What documents do you need them to provide
- How do you price these loans
- How do you market to find these buyers
- And much more!
We actually did a study over a 12-month period. During that time, we gave about 500 loans, 3 of which went into
foreclosure. Of those 4 loans, one was a person who had had a previous bankruptcy and managed to get himself into
another unfortunate situation. The other 3 were people like Person B - good employment history, good income, lots
of debt, and a very good credit history. One of them got laid off, another became ill, and the third was injured
on the job and was out of work for months. The bottom line is that we've had very good success with this segment
of the marketplace that other folks are reluctant to give mortgages to and you can too.
Click here for the next installment of this series.
Click here
for more articles by Mr. Sacks.
Visit Brian Sacks's web site at www.loanofficersuccess.com.
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