Subprime Mortgages

Subprime Loans

What are subprime loans?

If you have bad credit, you may not qualify for a conventional loan or a low down payment loan offered by FHA and VA. In this case, you may consider a subprime mortgage. Because of the higher risk associated with lending to borrowers that have a poor credit history, subprime loans typically require a larger down payment and a higher interest rate.

Subprime loans explained

You should study the specific terms of a subprime loan that you qualify for to determine if it is a loan that will help your financial situation. Subprime loans are one way for you to get into the home you want at today’s price. If you already own a home, a subprime loan can give you an opportunity to clean up your credit and ultimately refinance into a lower rate at a later time. If you have a mortgage, you can look at refinancing more than what you currently owe on the house and get cash back for the equity you already have in the home. This cash out could be used to pay off higher rate credit cards, bankruptcy, foreclosure or collections and liens. It could be a good way to clean up a troubled credit history, save money each month and start rebuilding your credit worthiness.

Subprime loans as short term loans

Whether for a purchase or refinance, subprime loans should typically be used as a short term solution, approximately 2-4 years. During that time, you can work to clean up your credit and qualify or a refinance into a lower risk, lower rate loan.

Subprime loan market

Prior to 1990 it was very difficult for anyone to obtain a mortgage if they did not qualify for a conventional, FHA or VA loan. Subprime loans were developed to help higher risk borrowers obtain a mortgage. Many borrowers with bad credit are good people who honestly intended to pay their bills on time. Catastrophic events such as the loss of a job or a family illness can lead to missed or late payments or even foreclosure and bankruptcy. Now there are mortgage companies that take into consideration events outside the borrower’s control, but not without a price.

High interest rates on subprime loans

Lenders are compensated for risk in the form of interest rates. The higher the lender perceived its risk to be, the higher the rate they will charge for the privilege of borrowing their money. The lower the risk, the lower the rate. Several risk factors are taken into consideration when evaluating a borrower for a subprime mortgage, the most important being your payment and credit history.

Qualifying for subprime loans

Your debt to income level, employment history, type of property and assets are other factors that are taken into consideration when determining if you qualify for a conventional, government or subprime loan.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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