Are Subprime Loans Worth It For Your Mortgage?

Exactly what IS a sub-prime loan lender?

Simply put, it’s a lender for borrowers who will not be able to qualify for loans from mainstream lenders. Many of these lenders are independent, but more and more are becoming affiliated with mainstream lenders who operate under different names.

Their prices are their only clear giveaway, as they are usually higher than those quoted by mainstream lenders. Also, some of these lenders will offer both prime and sub-prime loans. Often they will try qualifying you for prime, and will drop you to sub-prime only if that fails.

While some lenders who are strictly sub-prime might refer a prime borrower to an affiliated prime lender, most of the time their financial interest will dictate otherwise. No matter what a sub-prime lender might tell you, it is definitely to your advantage to go to a prime lender if you qualify.

Remember, the lower your credit scores are, and the smaller the down payment is, the higher the sub-prime lenders will base their rates. However, the entire structure of rates and fees is set higher to cover the risks of sub-prime lending. WHO MIGHT BE CONSIDERED FOR A SUB-PRIME LOAN?

Most often a failure to qualify for prime financing is due to low credit scores. Bottomline – a very low score will disqualify. Depending on the down payment, ration of total expense (including debt payments), plus income and assets, might or might not mean a middle score would qualify.

The purpose of the loan as well as the property type could also make a difference. If a borrower is weak in some factor, for example, he could still qualify if he was purchasing a one-bedroom home as a primary residence. However, if the purchase he was considering was a four-bedroom home he probably would not qualify.

Someone with poor credit scores is another type of borrower for this type of loan. A borrower could apply for an adjustable rate mortgage where the rate is fixed for two years, and then rises sharply. The trick is always to refinance before the two-year mark.

A prepayment penalty that runs past two years, and a lender who fails to report their payment history to the credit agencies, is a major threat to such a plan though. Borrowers should always be on their guard against both of these. THE MAJOR PROBLEM OF PRIME BORROWERS GETTING SUB-PRIME LOANS

With the development of the sub-prime market, a segment of the population that otherwise would have been shut out of the market now has mortgages and home ownership available to them. That’s the GOOD news.

The bad news is some of the borrowers who are eligible for loans from the prime lenders could possibly end up in the sub-prime market paying sub-prime prices.

Some sub-prime lenders are marketing aggressively to homeowners who already have mortgages. Their major pitch to the borrowers is the cash they could take out of their properties through a cash-out refinance. While lower payments are possible on interest-only mortgages and the option ARMS, it’s still a gamble that usually ends up in a heavy loss.

It should be noted that a higher percentage of sub-prime loans go into default than prime loans. Because more applications are rejected and marketing costs are higher, sub-prime lending costs are also higher.

The best advice in the end is keep your credit score high, save for a decent down payment, have little or no bills, and then go with a responsible prime or mainstream lender with a good reputation.

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