Subprime Loans
According to experts with the growing interest in real estate purchasing and speculation, more and more lenders are offering nontraditional types of mortgages. It is worth mentioning in this regard that these include adjustable rate mortgages (ARM) of every shape and size, much popular interest-only mortgage, and the very dangerous Option ARM mortgage, which can cause the amount you owe to actually increase as time passes. Theoretically speaking one rapidly growing sector of the lending market is the so-called subprime market, which caters to consumers with poor credit records.
There is no denying that the subprime market is a profitable one, as lenders offer loans to consumers whose poor payment history targets them as risky clients. Yes, there is no hiding the fact that they are risky clients, but the lenders charge fees and interest rates that are high enough to offset the additional risk. Fact remained that people who are interested in purchasing a home should be careful, however, as many people who should qualify for traditional supreme loans are being pushed into higher-priced subprime loans instead.
Point to be noted in this regard is that the subprime market is quite a lucrative one for lenders, who are able to charge high fees and interest rates due to the increased risk posed by clients with substandard credit histories. More often than not a subprime borrower might pay an interest rate that is several percentage points higher than that of a traditional loan, and the fees may include several additional points as administrative fees. It is worthwhile remembering that a point is one percent of the loan amount. In an ideal scenario this can add several thousand dollars to the closing costs and tens of thousands of dollars to the cost of the loan over the life of the typical 30-year mortgage.
While there is no denying that it is understood that customers with poor credit histories represent a higher risk to the lender, potential borrowers need to make sure that they arent classified as supreme loans by their prospective lenders. If experts are to be believed studies show that up to 15% of subprime borrowers have credit scores that should have entitled them to loans at lower, more traditional interest rates. Putting in simple words what this means for potential borrowers is that you should shop around for the best price on a loan and not accept it as fact when a lender tells you that you dont qualify for the traditional rates. It is worthwhile remembering that the Federal Trade Commission is investigating several lenders who have increased their profits tremendously by steering borrowers who should have qualified for low-interest loans into higher-interest subprime loans, claiming that they didnt qualify for the lower rate.
The question now arises: How can you avoid such problems It is advisable to obtain a copy of your credit report. As a matter of fact you can obtain one, with your credit score, from any of the three major credit bureaus Experian, Equifax, or Trans Union. As a rule, it is worth pointing that lenders offer subprime rates to customers who have credit scores below 620. In case if your score is higher than that, you should be able to qualify for a better interest rate. On the other side of the coin if not, you can either accept the higher rates from lenders, or take time to improve your score by paying off some bills in a timely manner.
According to experts perhaps you have seen a television commercial or billboard advertising
super low mortgage interest rates. Fact of the matter is if you have good credit, you are likely a good candidate for such loan programs. On the other side of the coin, if your credit score is low, obtaining a supreme loans rate is not very feasible. Always remember in that scenario, a subprime loan is the best option.
Subprime vs. Prime Mortgage Loans
Point to be noted in this regard is that individuals familiar with home loans are likely aware of two loan programs. Theoretically speaking those with a good credit rating will generally qualify for prime loan rates. Moreover, it is worth pointing that homebuyers who have cash for a down payment and closing costs will also qualify for prime rates. If your home buying situation is slightly different then in that case you may qualify for a subprime loan.
What Are Subprime Mortgage Loans
There is no denying that Subprime mortgage loans are primarily offered to individuals with low credit scores. Fact remained that these persons do not qualify for traditional financing. It is worth mentioning in this regard that mortgage companies and other financial lending institutions have exact lending requirements. Thats why if an applicant does not fit their criteria, the loan application is denied.
While there is no hiding the fact that getting approved for a mortgage loan with bad credit is a major feature of subprime loans, there is one main drawback to subprime loans. Because of the simple reason that large portions of the loans are granted to individuals with poor credit, the odds of these loans defaulting are high. Blame it to this, most subprime loans have a higher interest rate. Of course, it is worthwhile remembering that rates depend on credit. If experts are to be believed applicants with fair credit may get approved for comparable rates, whereas those with extremely low credit scores can expect rates with a two or three point increase.
How to Choose a Subprime Mortgage Loan Lender
Point to be noted in this regard is that some lenders specialize in subprime loans. Furthermore, it is worth noting that many traditional mortgage companies have begun offering subprime loans. In an ideal scenario the fastest and easiest way to locate a reputable subprime lender is through a mortgage broker.
There is no denying that everyone's situation varies. This is the reason why some bad credit applicants have funds for a down payment and closing, whereas some prime applicants do not have extra money to cover these costs. More often than not a mortgage broker is able to find the best loan program for your situation.
To begin, it is of utmost importance that applicants will need to submit a quote request. As a matter of fact you must include information such as income, credit rating, home price, etc. In simple terms based on your profile information, lenders will compete for your business and submit detail quotes. By following this route, you are able to review mortgage rates and terms before choosing a supreme loans package.
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