There are companies in college towns that make their money by renting apartments to college kids and keeping their security deposits when the kids move out – no matter what.
It is an incredibly slimy practice because the firms prey on the kids who can least afford to absorb the expense or fight back.
Sidebar: This happened when I was in college, but unfortunately for the apartment complex owner, one of the victims’ fathers was a high-powered class-action attorney in LA. Needless to say, he formed a “class of aggrieved former tenants,” and he ended up owning the entire 400-unit complex. Sometimes, trial lawyers are a good thing.
I am sharing the story about the slimy apartment owners because we once had a borrower with collections from one of them on his credit report. The firm not only kept his deposit, but they hit him with additional charges for utter nonsense, and the borrower refused to pay on principle. The slimy firm promptly reported the collections, and the borrower’s credit score fell below 600.
The borrower was able to get a loan, but he had to write a very strong letter of explanation and still had to pay off the collections – as painful as it was (he could have litigated, too, but that would have been more expensive).
So, can a borrower with a high income and a 560-credit score get a mortgage? (This is a question we get surprisingly often.)
The answer is yes, but the options are limited.
- FHA and VA will both accommodate very low credit scores.
A. But debt ratios have to be very low.
B. There needs to be a clear letter of explanation that proves that the credit events were/are: (1) one-time, (2) over with; and (3) very unlikely to repeat. And
C. Down payment requirements will often be larger than normal – 10% to 25% (vs 0% for VA to 3.5% for FHA). - Non-QM Loans will usually NOT work for scores under 600 – even with large down payments.
- “Hard/Private Money” is the other option. But, the rates, fees, and down payment requirements are all very high.
Examples of One-Time Events That Underwriters Accept
Here are some examples of one-time events that underwriters will accept – but they often want to see paperwork or records that corroborate the explanation.
- A nasty divorce that is over and settled.
- A dishonest business partner who absconded with funds.
- A major business failure that is in the past.
- Embezzlement.
- Identify theft.
- Natural disasters (hurricane, flood, tornado, etc.).
Bankruptcies are also kosher, but they often need to season for 1 to 2 years from the discharge date. And – credit needs to be re-established.
Letters of Explanation – “Oh No, I’ve Said Too Much…”
Michael Stipe sang that shortly after writing a letter of explanation for his mortgage company – and costing himself a loan.
This is because borrowers always say too much in their letters – adding in info that just sparks more inquiry and skepticism from underwriters.
Good mortgage lenders always review letters and help borrowers stick to the facts, with careful framing.
This is kosher: “A tornado picked up my house and took me to a strange green land, and it took forever to get back to Kansas…” (nothing more is needed).
This is not kosher: “A tornado picked up my house and took me to a strange green land – where I totally freaked out and ended up having a cocaine bender with these little people and three delusional dudes in costumes. And don’t even get me started about those flying monkeys! Anyway, the drugs were awesome, and I just did not feel like paying my bills…” (the borrower should never have mentioned the flying monkeys).
