A reader sent me an email yesterday asking, "Hey David, my lender is increasing my interest rate just because I've been at my job less than two years. Can they do that?"

Yes. Lenders can do that. They can do mostly anything they want as long as they do it without prejudice and they can make as many goofy lending rules as they see fit. Fortunately, there really aren't that many goofy rules that are different from lender to lender. But sometimes there are certain "quirks" that a lender may call "exceptions."

A lender will make an exception to a lending guideline, but only if that lender has previously negotiated that exception with their investors. Each time an exception is granted, the lender will most often increase the price of the loan, typically because any negotiated exception costs them extra, too.

Exceptions are few in the conventional world, where Fannie and Freddie have set lending parameters. Exceptions are most often found in the "alternative" lending environment, usually called "Alt" or "Alt-A" loans.

Alt loans aren't specifically designed for those with bad credit. In fact, that's why many lenders who use Alt products also have the "A" immediately following it, letting borrowers and mortgage brokers know that although it's an Alt loan, it's also for "A" quality paper.

There are Alt loans that allow for lower credit grades but being Alt is not synonymous with bad credit.

And it's in the Alt world where most exceptions are found, and what my reader experienced.

In a conventional world, where a loan would require being self-employed for two years or no loan approval, an Alt loan could allow it. Yes, the rate would be a bit higher than a similar conventional model but not by much.

Or a borrower was having trouble documenting her income for two full years. An Alt loan could accommodate for that. Perhaps a debt ratio was higher than what was required for a particular loan program … again, an Alt exception could be made.

Each time an exception is issued, the lender will typically either increase the rate or the discount point or both. Some lenders limit the number of exceptions a borrower may have and still be approved.

It's in the Alt world that people who don't quite fit the conventional or government box should look when they have problems qualifying. Common Alt loans can allow for multiple property ownership. Where a conventional loan might now allow a borrower to acquire more than 4 investment properties every two years or limit the number of properties a borrower can own, an Alt product could work.

Perhaps someone wants to buy a four-plex but only has 10 percent down. Conventional loans require 25 percent down, while an Alt product can be found with only 10 percent down.

Who has Alt loans? Your mortgage broker does. So does your mortgage banker. Alt loans are actually quite common, you just don't hear them advertised as Alt. But when a lender says they can approve your loan under certain circumstances or allow for something "just outside the box" they're talking about Alt loans.

And your lender can raise your rate just because you've been at your job less than two years. But that's okay. Now you can qualify for a home loan instead of waiting.

Published: June 16, 2006

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