Among those lenders issuing mortgages, sub-prime lenders are considered to be a subset of standard lending institutions. Sub-prime lenders offer loans to borrowers that do not meet the qualifications for loans by mainstream lenders.
Because mainstream lenders typically loan to prime borrowers, the sub-prime lenders provide a loan source to individuals with problems such as poor credit history, lack of consistent income, or any other number of issues that would not define them as prime. Sub-prime loans account for over $200 million of the lending industry in the United States; however, over 4.5% of all sub-prime loans have fallen into delinquency between 2007 and 2009
Identifying Sub-Prime Lenders
Some sub-prime lenders can be independent investors or may also be close affiliates of the mainstream lenders, although they usually operate under a different name for tax and acceptability purposes. In most cases, sub-prime lenders are not easy to identify because no company or individual usually engages in marketing promoting sub-prime loan practices.
However, it is easy to determine a sub-prime lender based on overall higher prices that those offered by mainstream lenders. Even many prime borrowers have borrowed from sub-prime lenders because of the vague identification of the lending institutions or individuals. Despite the higher interest rates, sub-prime loans may be excellent resources for individuals seeking to pay off higher interest debts such as those usually found within credit card debt. However, when it comes to mortgages, sub prime loans are rarely a good idea as interest rates will often be exorbitantly high, making the mortgage extremely expensive over the life of the loan.
Interest Rates
Sub-prime loans tend to have interest rates that are higher than the rate of prime that is offered by the mainstream lending sources. While around six percent is the standard interest rate for mortgages, sub-prime loans offer rates starting between eight to ten percent. This means that the amount of interest charged for sub-prime loans can often be worth tens of thousands of dollars more than the original loan amount over the entire term of the loan.
FHA Mortgages: Sub-Prime Lender Alternatives
FHA-approved loans are often some of the most popular alternatives for sub-prime loans in the United States. The initial interest rate for FHA loans is much lower than that of sub-prime loans, beginning at around five percent. However, the FHA does not issue mortgages themselves and many FHA lending institutions have initiated an annual increase of two percent for the interest rate.
In the end, FHA-approved loans can save you thousands of dollars over the lifetime of the loan. Furthermore, depending on the reason you need the loan, many institutions are able to offer FHA-approved funds for loans that meet the requirements for necessary home or auto repairs. These loans can often increase the amount you qualify for and start off at a very low interest rate.
It is important to research other alternatives before jumping immediately into sub-prime loans that may be difficult to repay despite being appealing. While you may be focused only on qualifying for mortgages, sub prime loans still remain a poor option for most bad credit buyers.
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