What Does a B-C-D House Credit Scoring Mean?

The B, C or D credit grade is a classification of credit risk that is done on a sliding scale and applied to subprime mortgage borrowers. This classification has been commonly used to categorize borrowers to quote a rate and program for approval. This type of loan is an example of a nonconforming loan because it does not fit the guidelines set by the Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corp. (FHLMC).

How B, C, D Grading Worked

When someone was told that they fall into the credit risk category of B, C or D graded credit, this put them into a sub (below) prime rating classification. This sliding scale of risk was expressed in a breakdown of benefits and restrictions to the borrower as to a percentage of his appraised value, how much derogatory credit he had, and what his credit scores were. The following breakdown of each category is typical of what a subprime lender would allow for, however, since there was no uniform set of guidelines for subprime, this would vary from lender to lender.

B Graded Borrower

The typical "B" graded borrower would have a mid score (out of three credit reports) of 620. He could have debt ratios (including the new house payment) as high as 50 percent of his gross monthly income. He could have some 30 day lates within the past 12 months even on his mortgage, but no 60-day lates. If he had a bankruptcy, it should have been discharged two to four year previous. This new loan could be as much as 85 percent of his appraised value. His income would have needed to be documented, although there were some "stated income" (unverified income) loans available for "B" borrowers.

C Graded Borrower

The "C" graded borrower could have a mid score of 580, and his debt ratios could be as high as 55 percent of his gross monthly income. Due to the risk level, the income would need to be documented and verified.

He could have more derogatory credit than the "B" borrower, including some 60 day lates, even on his mortgage. The loan could go as high as 75 percent of the appraised value of his home. If there had been a bankruptcy, he had to be at least 12 to 24 months past the discharge date. In the event he had many 30 day lates consecutively, they were all considered as one. This is known as "rolling 30's."

D Graded Borrower

The "D" borrower could have a mid credit score out of all three reports of 550. The loan amount might only go to 60 percent of the appraised value. He could have 60 day lates on his mortgage, but the loan could not be in foreclosure. He could have 90 day lates on other accounts, and if there had been a bankruptcy, he needed to be discharge at least one year. Any judgments against him needed to be paid from the loan closing.

Lender Offerings

The typical loan offered would be an adjustable rate mortgage (ARM) with a frozen period. They were called two-year fixed or three-year fixed loans. They would freeze the start rate for two or three years, then the loan would begin adjusting at the end of the frozen period. This loan usually had a prepayment penalty attached if it was paid off within the first two or three years. The beginning rate for the "B" borrower would be lower than for the "C" borrower, and the "D" borrower would be very high.

Benefit to the Borrower

The benefit to the subprime borrower was that if he had equity in his home, and found himself in a position to need funds to pay off creditors, this refinance would put him back on his feet financially, and with two or three years of good payment history, he could refinance to a better loan. This didn't always happen.
The mortgage meltdown occurred as a result of so many foreclosures. This grading scale is no longer on the mortgage radar since there is no subprime lending available. If the borrower does not fit the guidelines for conventional (FNMA or FHLMC) lending, FHA or VA, there is little to offer him.