About Sub Prime Mortgages

If you have applied for a mortgage loan and were told by your broker or banker that your loan qualifies under a sub-prime mortgage, you were probably confused. When they told you that you needed between 10-20% in equity, you probably felt scared. And when they told you that your rate would be above 10% with a couple of points, you most certainly thought they were trying to take advantage of you.

How could someone honestly expect you to consider paying an interest rate above the 30-year fixed rates advertised in the papers? Many homeowners have asked the answer to this question over the past several years. Prior to 1990 it was almost impossible for borrowers to obtain a mortgage if they did not qualify for either a conventional or government loan. The non-conforming (sub-prime) lending market was developed to assist borrowers who fell into a higher risk category in obtaining a residential mortgage loan. Many borrowers are good people who honestly intended or intend to pay their bills on time. A catastrophic event, loss of employment, transfer in job could all be good reasons for falling behind on scheduled payments. A previously unforgiving bank now has the latitude to take into consideration events outside the borrowers control. The human touch has been added into the mortgage loan industry; but not without a price.

Consumers need to understand that banks get compensated for risk in the form of interest rates. The lower the risk, the lower the rate and vice versa. Therefore, there are several risk factors taken into consideration when evaluating a borrower for a mortgage loan in the sub-prime market. Obviously, the first thing we look at, is how you have managed to pay your bills and manage your credit in the past 2 to 5 years. Late payments that are 30 days are generally considered minor problems however 60, 90 and 120-day late payments can make you a "C" credit risk from the start. Credit scores below 620 even with a good credit repayment history will also place you into a higher risk category as will bankruptcy and foreclosures.

Other factors that are taken into consideration are your debt to income levels (usually anything over 40% of your gross monthly income will place you into a sub-prime loan), employment history if less than 2 years, type of property, lack of assets, basically anything that falls outside of conventional or government lending guidelines.

So why consider a sub prime loan?
For several reasons, in a purchase transaction most borrowers can get into the home they want at today's price. Once in the home a borrower now has an opportunity to clean up their credit, reestablish new credit and ultimately refinance into a lower rate at a later time. If the borrower already has a mortgage, a refinance to cash out equity to pay down higher rate credit cards, bankruptcy's, foreclosures or collections and liens is a great way to clean up a troubled credit history, save money each month and get back on your feet.

Remember these loans are typically for the short term, approximately 2-4 years. Most borrowers by then have cleaned up their credit and now qualify or a refinance into a lower risk, lower rate loan. So start saving today or get the home you want, a sub-prime loan is waiting for you if you can't get a loan traditionally.


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