Are Subprime Loans Worth It For Your Mortgage?

What Is A Subprime Loan Lender?

This is a lender who lends money to borrowers who do not qualify for loans from mainstream lenders. Often these lenders are independent, and yet more and more are affiliate with mainstream lenders operating under different names.

The only clear giveaway are their prices, which are higher than those quoted by mainstream lenders. And some of these lenders offer both prime and subprime loans. They will try to qualify you for prime and only if that fails will they drop you to subprime.

Lenders who are strictly subprime might refer a prime borrower to an affiliated prime lender, but their financial interest dictates otherwise. It is definitely to your advantage if you quality to go with a prime lender no matter what a subprime lender might tell you.

Subprime lenders base the rates higher the lower your credit scores are and the smaller the down payment is. However, the entire structure of rates and fees is higher to cover the risk of subprime lending.

Who Would Be Considered For A Subprime Loan?

The failure to qualify for prime financing is due primarily to low credit scores. A very low score will disqualify. A middle score might or might not, depending on the down payment, the ratio of total expense (including debt payments) plus income and assets.

Also, the purpose of the loan and the property type could make the difference. For example, if the borrower is weak in some factors he could make it if he was purchasing a one-bedroom home as a primary residence. But if he were purchasing a four-bedroom home he would not qualify.

Another type of borrower for this type of loan is someone with poor credit scores. They apply for an adjustable rate mortgage on which the rate is fixed for two years, and then rises sharply. The trick is to refinance before the two-year mark.

The major threat to such a plan is a prepayment penalty that runs past two years, and a lender fails to report their payment history to the credit agencies. Borrowers should be on their guard against both.

The Major Problem Of Prime Borrowers Getting Subprime Loans

The development of the sub-prime market has made mortgages and home ownership available to a segment of the population that otherwise would have been shut out of the market. That’s the good news.

The bad news is that some borrowers who are eligible for loans from the prime lenders can end up in the subprime market and pay subprime prices.

Subprime lenders market aggressively to homeowners who already have mortgages. A major pitch is the cash the borrowers can take out of their properties through a cash-out refinance. Also, lower payments are possible on interest-only mortgages and the option ARMs that are a gamble, which usually end up in a heavy loss.

A higher percentage of subprime loans than of prime loans go into default. Subprime lending costs are also higher because more applications are rejected and marketing costs are higher.

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