This Week's Question

January 17, 2005

By Nena Groskind

Q:  We have owned our home for 10 years and, except for a six-month period about a year ago, our payment record has been spotless. We encountered problems when my husband lost his job (he since has obtained an even better-paying one), and although our mortgage payments never were technically delinquent (more than 30 days past due), there were several months when we paid more than 15 days after the due date, and had to pay late charges as a result. When we tried to refinance recently, the lender from which we originally obtained the loan said we didn’t qualify because of our late payment record. Is this a standard rule applied by all lenders and is there any way around it?

A:  The rule your lender cited is a creation of the secondary mortgage market – a broad term that generally encompasses all the investors who purchase mortgage loans lenders, but refers specifically to the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Those two entities establish the guidelines that most (although not all) mortgage lenders follow. The secondary market rule of thumb holds that a borrower seeking to refinance an existing loan can’t have paid more than 30 days late more than once in the 12-month period preceding the refinancing request. Apparently, you managed to avoid slipping over that 30-day line, despite your financial difficulties, and most lenders probably would consider that a point in your favor. Also bolstering your position is the length of time you have owned the home and your generally solid repayment history, both of which suggest a level of stability that lenders are likely to find reassuring.

Lenders that retain some loans in their own portfolio may be less rigid than secondary market lenders (although not necessarily), but even secondary market lenders have more flexibility in dealing with a situation such as yours than many recognize or are willing to exercise. While some lenders will simply cite the secondary market rule and move on to loans that don’t pose any problems and thus can be processed quickly, most of the lenders I contacted said they would deal with situations like yours on a case-by-case basis, looking carefully at the circumstances of the individual borrowers involved. Their primary concerns in reviewing your application would be:

If you can demonstrate that your financial problems really are behind you and that you have been making your mortgage payments on time for at least the past two or three months, many lenders say they would look favorably on your application. However, if you are still struggling (with your mortgage or any other debt payments), you will have a harder time persuading a lender to champion your cause with the secondary market investor to whom your loan is going to be sold.

Your best is to go back to your existing lender and state your case again, making sure the loan representative understands that the “late” payments showing up on you record do not include any that went beyond 30 days. Also make sure the loan officer understands the source of your problems and why your situation has improve. If the loan officer with whom you are dealing seems unresponsive or clueless, insist on talking to a supervisor, who may be more knowledgeable, more sympathetic, or both. If that doesn’t work, apply elsewhere. The market is competitive and I think you have a good chance of finding a lender who will be willing to work with you. But be sure to disclose your past payment problems up front and ask for a preliminary reading on whether your history will disqualify you before the lender proceeds to the next step and orders an appraisal. You don’t want to incur any application costs if it turns out that your credit problems are going to be impossible to overcome.