What are the main differences between prime and sub-prime applications?
Essentially, there is no difference between them. With both prime and sub-prime applications, the mortgage adviser must look carefully at lenders’ product criteria, to see which lender and product matches their client’s needs.
The two types of application start to diverge when a mainstream lender has fairly standard credit criteria and makes extensive use of credit scoring (for example, a few products designed for bulk lending) and a sub-prime lender offers many products to cater for specialist needs. Here, the specialist lender is always trying to strike a balance between security and risk. For example, if the LTV is low, specialist lenders may be happy to allow a higher degree of adverse credit, or, if the LTV is relatively high, the lender may want to see full documentary proof of earnings rather than allowing self-certification.
The resulting portfolio of products will mean the adviser dealing with a non-mainstream client must look more carefully at the lender’s criteria than when dealing with a mainstream applicant.
How much adverse credit does it take to make an applicant sub prime?
The idea of adverse and sub-prime credit is not a description of a certain kind of applicant per se. It is a by-product of the growth of credit scoring and credit referencing used by mainstream lenders to, in effect, make the lending decision for them. Before the mid-1990s, the sub-prime mortgage market did not exist because anyone with a past history of credit problems could simply not get a mortgage at all. Since then, a number of lenders have been willing to take a higher level of risk than high street lenders, and have produced products for borrowers who have had credit problems in the past.
The classic categories for grouping such borrowers is by asking how many county court judgements (CCJs) and arrears they have, and whether they have been bankrupt or are involved in an individual voluntary arrangement (IVA) with their creditors. However, there are many other factors that will cause borrowers to be declined by credit scoring systems. It is a matter of advisers getting a good feel for what sort of applicant the various specialist lenders can cater for, and then matching them to each client.
Why are interest rates for sub-prime mortgages higher than for mainstream?
This is the simple economics of risk and rewardš that is common to all financial services products. A good analogy is that of motor insurance or private health insurance. Those with a history of claims, or a lifestyle that is known to be high riskš will have to pay a relatively higher premium for cover. Similarly, those with a history of credit difficulties are classed as high risk, so lenders need to charge a premium to cover that.
What are the most common mistakes made on sub-prime applications?
These will be the same for specialist lending as they are for mainstream. For example, not supplying the specified documentation, missing out questions or even the applicant not signing the form. Also ‘ and this is not something the mortgage adviser can always guess in advance ‘ applicants sometimes forget or gloss over their history, without realising that further credit status searches will come up with a different history of addresses, or more overall outstanding adverse credit than the applicant originally stated.
Why do most sub-prime applications go through packagers?
Most specialist lenders use highly experienced underwriters to make the lending decisions. In order for them to do their job effectively, they need a stream of properly completed applications, with documentary back-up where necessary. By using specialist and experienced packagers to filter applications from individual brokers, lenders can be sure they will receive well-packaged applications.
How can advisers ensure a quick decision on sub-prime applications?
We always work on the principle that, in specialist lending, a quick decision is more important to applicants than any other service element. This is just as necessary when declining applications as it is when making an offer. In short, there are a few golden rules to remember:
• Do not ignore questions on the form that look awkward for the applicant to complete in the hope the lender will not notice. It will just cause delays.
• Do not send in extra information on one topic, in the hope this will compensate for a lack of information in another area. Again, all this will do is cause unnecessary delays.
• If there are mitigating circumstances for the borrower’s past problematic credit history include a short written explanation.
• Title insurance can speed up applications considerably, so it is worth getting to know about it, and which lenders specify it.
• If speed is important to your clients, and you need a decision and/or completion quickly, then place the application with a lender who is known to you either by experience or reputation as one that can guarantee a quick turnaround.
Stuart Aitken is director of credit at Southern Pacific Mortgage Limited (SPML)