With a special type of loan, borrowers with spotty credit can reduce their higher interest rates if they show themselves reliable customers.
More than two dozen lenders participate in the Fannie Mae program called "Timely Payment Reward." In the program, qualifying borrowers will be able to finance their homes at a mortgage rate as much as twopercent lower than what credit-impaired borrowers typically pay.
While the start rate will remain a point or so higher than rates for borrowers with good credit, Fannie Mae's timely payment loans automatically drop one percent after 24 delinquent-free monthly payments.
Underserved Populations: "There remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called sub-prime market," says Franklin Raines, Fannie Mae chairman and chief executive officer.
Among the lenders in the program are Cendant Mortgage Corp., Downey Savings & Loan, First Nationwide/Cal Fed, First Union and Fleet Mortgage.
In June, Internet mortgage broker iOwn.com began offering the loan to its online customers. "Instead of having to turn away borrowers with past credit blemishes, brokers can now offer these borrowers a mortgage that meets their needs," said Linda MacBain, director of iOwn's BrokerConnect wholesale lending program.
Deep Rate Reductions: With starting rates that could be higher than the rate for the Fannie Mae program, some private sub-prime lenders offer even deeper rate cuts.
The Associates, based in Irving, Texas, offers a "Freedom Loan" with up to 2.25 percent in downward adjustments over three years.
After 12 consecutive on-time payments, the rate drops 0.50 percent, another 0.75 percent after 12 more payments, and another 1 percent after 12 additional on-time payments.
If you use one of the mortgages, make sure you understand your lender's definition of on time. The Associates' Mindy Smith says an on-time payment must be made between its due date and the day before the next scheduled due date.
