What is a Subprime mortgage? Can you get one in today’s economy? These are all good questions but the answers may surprise you.
A Subprime mortgage is a mortgage designed for borrowers that have lower credit scores. Credit scores ranges from 300 to 900 and most consumers in America have a score that ranges between 600 and 700. Anyone with a score above 720 generally has their pick of credit offers and usually qualifies for the best of loans. But borrowers who are looking for mortgages but have scores that are lower than 620 will be looking for loans listed as Subprime Mortgages.
If you are someone who usually pays your bills late or fall behind on debts from 30-90 days you will fall into this category. This actually falls on most Americans since the average American has a score of 620. So if you have an average score or below, you will need to shop by comparison on your mortgage.
Subprime loans will have higher interest rates than prime loans. Mortgage lenders look at these subprime loans in a process called “Risk-Based Pricing”. This means that they will try and determine how much of a risk you are and charge you accordingly. It makes it impossible to put your finger on a subprime rate since most lenders will weigh many different things when determining your interest rate and fees. The larger your down payment, the types of delinquencies you have in your recent past will help determine that rate. For example if you are showing that you’re paying your mortgage or rent late but making your credit card payments on time, you will be a higher risk for a mortgage loan. But if you have high medical expenses and lenders see that you have been paying your mortgage or rent on time, then you might get a break on your interest rate.
Subprime loans also may have a balloon payment or a prepayment penalty. If you decide to pay your mortgage off early, then you have to pay a penalty or a balloon payment that will be assessed after a certain period of time. If you can’t afford to make the balloon payment then you might have to refinance or sell the home.
Subprime lenders will tell you that you get lower interest rates in exchange for the prepayment penalties or balloon payments but this is very debatable.
As a subprime customer you need to be aware of many lenders that will be looking to take advantage of the situation. Since you will have a more difficult time in getting a mortgage some lenders will use that to make it easier for you to get a loan and will end up taking you to the cleaners. These types of lenders will try to cheat borrowers with outrageous fees or sky-high interest rates. The lenders might even tell you that your credit score is lower than what it truly is. The lender might also pressure you into refinancing your home often and will be collecting closing fees each time. They may roll them into your new mortgage amount but you will still be paying these fees each time.
The unethical mortgage lender will be looking for you to default so that they can foreclose on you and start all over with another victim. The ethical lender will not want to foreclose on you because it really is a money losing process. The ethical lender will make money on the interest that they are charging you and will lose money if they have to foreclose. The bad mortgage lender will make profits by repeating the process of collecting closing fees and then seizing the house.
But you can protect yourself by knowing what your credit score is prior to shopping for a mortgage and use people that you know and trust to help locate some mortgage lenders. Use comparison shopping to compare several different mortgage brokers or lenders. There are as many ethical lenders as there are unethical ones so watch out.