A home buyer’s FICO score and the LTV (loan-to-value ratio) can help determine what type of mortgage a borrower can qualify for. Loans given to borrowers that have poor credit scores and high LTV are known as subprime loans. These loans have higher interest rates than conventional mortgages.
Before 2007, lenders would regularly make subprime mortgages for borrowers with credit scores of under 620. Many times, borrowers who had a score of only 580 were eligible for 100% financing. After the housing market crashed, subprime loans became scarce and much harder to qualify for. These days, lenders will not provide full financing for subprime mortgages unless it’s a VA loan.
Subprime mortgages are given to borrowers who have bad credit and cannot qualify for conventional mortgage loans. Since lenders are taking a higher risk than normal, these mortgages usually come with higher interest rates than conventional loans. There are a few types of subprime mortgages available to consumers today, the most common being an adjustable-rate, which comes with an initial fixed-rate period.
Adjustable-Rate Mortgages can be misleading to those who have subprime loans, since they initially pay a lower interest rate. Once the mortgage resets and the rate becomes variable, the payments will shoot up dramatically.
Subprime mortgages may also come in the form of balloon loans, or a hybrid of an ARM and a balloon loan. A balloon mortgage has a one-time, large lump sum payment at the end of the loan term. Usually, the payment will be a large percentage of the loan amount.
Remember, just because a lender offers a subprime loan to you doesn’t mean that you have to take it. You may very well qualify for an FHA or other type of loan. Ask your broker to help you decide which loan is right for you. Consider the following when shopping for a subprime loan:
For years after the housing bubble burst, subprime mortgages practically disappeared. Slowly but surely, lenders have begun to increase subprime lending. This is because lenders realized that many home buyers who went through a foreclosure or short sale are good candidates for mortgages, and are willing to pay higher interest rates to finance their purchase.
There are some borrowers who use subprime loans with high interest rates like bridge loans which are short term loans used to fill the gap until financing is attained. The subprime mortgages of today are different than those that were made during the housing bubble.Unlike in the past, lenders will take into account collateral, down payment amount, income, and the ability to pay, when qualifying applicants for subprime loans.These new loans are much safer than the loans made less than a decade ago. Lenders now have more rigorous qualification standards that borrowers must meet. These qualifications ensure that borrowers are not purchasing loans for homes they cannot afford.