Borrowing from Sub prime Lenders

From the Superpages.com

Subprime lenders are lending organizations that make mortgage loans to borrowers whose credit rating prevents them from obtaining a traditional loan from conventional lenders. Those with credit ratings that fall below 620 (on a scale that ranges from 300 – 850) have a higher default rate than those with ratings above 720. Because of the risks associated with lending to those with poor credit, subprime lenders assess higher interest rates and fees.

Credit problems

A borrower may have developed a poor credit rating due to any number of factors. Among the most common issues are:

• Payment delinquencies (two or more payments past thirty days due, or one past ninety days)
• Charge-off (a statement by a creditor that a debt is unlikely to be collected)
• Bankruptcy
• Judgments (foreclosure, repossession, loan default)
• Errors on credit reports
• Debt-to-income ratio

Types of subprime mortgages

Because of the risk factors involved with lending to those with bad credit, several subprime mortgage options are available with terms that mitigate the risk.

1. Interest only mortgages – For a period of time, usually five to ten years, the borrower pays only the interest. During that time, the principal remains unchanged. At the end of the period, the loan is resets either according to the terms of the mortgage contract, or a new mortgage is taken out.
2. Pay out option mortgages – With this loan, the borrower selects the type of payment – full payment, interest only, or a minimum payment (which may or may not be low enough to reduce the loan balance). These loans are usually Adjustable Rate Mortgages.
3. Hybrid mortgages – This is the most common type of subprime mortgage. With this loan, the interest rate is fixed for a specific period (usually two or three years). At the end of that time, the interest rate becomes adjustable for the remaining time. A 2/28 mortgage is the usual type: the interest is fixed for the first two years, then adjusts annually (usually to a higher level) for the remaining twenty-eight years.

Why Assume a Subprime Loan

If the borrower is dealing with a reputable subprime lending institution, there are some advantages. With a subprime mortgage, a borrower can:

• Buy a home
• Rebuild credit – especially with hybrid mortgages or interest only loans. The early fixed-rate allows the borrower to make monthly payments that will slowly work to restore his or her credit rating to a better level. When the fixed-rate period expires, an improved credit score may qualify the borrower for a conventional loan.

Be Careful

Many reputable, subprime lenders are ethical in their practices. However, subprime lending has been subject to predatory lending practices. If considering a subprime loan, research the history of the lenders. Consulting with HUD, not only about the lending institution, but about your eligibility for a subprime mortgage as well, is the safest route to take.