Backup Bucks If your customer isn’t a prime candidate, there is still plenty of money available, but it will come at a premium.
No one knows exactly how much potential business remodelers lose because of credit issues, but casual estimates we’ve heard from finance companies range from 27% to as high as 50%. That’s where sub-prime lenders come in. These companies specialize in financing home improvement projects that first-tier lenders reject. Any remodeler offering financing should have a relationship with one or more of these lenders.
NUMBERS GAME First-tier lenders use automated underwriting systems that put great weight on an applicant’s FICO score. The score, developed by California–based Fair Isaac & Co., can range from 300 to 800. According to Fair Isaac’s Web site (www.myfico.com), median scores are around 723, and someone with a score of 760 or better will pay $231 less per month for a $216,000 30-year, fixed-rate mortgage than someone with a score below 620.
While all lenders look at FICO numbers, sub-prime lenders consider other factors to paint a more comprehensive profile. “Our underwriters evaluate each applicant’s financial capacity, collateral, and character,” says Tom Hewitt, president and CEO of AmeriFirst Home Improvement. “That’s how finance companies used to work 20 or 30 years ago.”
In fact, Bill Simone of HomePlus Finance, a sub-prime lender based in Los Angeles, says that while most first-tier lenders won’t consider someone with a score below 600, his company recently financed what he calls “a new low” — someone with a score of 439. “Our analysis told us that there was nothing in their credit to indicate that they wouldn’t pay us.”
Some of this flexibility stems from the source of the funding. Sub-prime lenders generally lend money from private investors, so they can take a bit more risk than either banks, which are regulated by the FDIC, or finance companies, which must answer to their shareholders. “We use our own money so we can tolerate higher losses,” Simone says.
Risk Determines Reward But flexibility
