There are times when getting financing is
difficult. For example, credit problems can stop you from
securing a mortgage to purchase a home. But don't worry. If your
credit issues are minor, you can still qualify for a mortgage.
Special lenders, called subprime mortgage lenders,
have programs designed specifically for American homebuyers with
credit problems. Subprime mortgages are designed for borrowers who
have credit scores under 620.
Credit scores are a way of ranking the risk associated
with a borrower. They range from about 300 to 900, with the majority
of Americans falling in the 600s and 700s. If you pay your bills on
time and are a good borrower, your credit score will be high. This
indicates that you are not at risk for defaulting on a loan. If you
are habitually late on your bills, have fallen behind on your debts
or unknowingly had your identity stolen, you will have a low credit
score. If it is below 620, a subprime mortgage may be your only
Most lenders will not come out and say that they are
"subprime" lenders. That is because it sounds as if they aren't good
lenders. You may hear "non-prime" instead, or references to
specializing in borrowers with less-than-perfect credit.
When you are a borrower with excellent credit, your
choices are few. You simply get the going rate for a mortgage. This
doesn't vary from lender to lender by much.
But if you are a subprime mortgage candidate, offers
will vary widely depending on the lender. Each subprime lender uses
different means of weighing the risk you are associated with. This
is when shopping around for the best deal becomes very important.
What makes subprime mortgages different?
Any time risk increases, you can be sure that the
interest rate increases as well. Subprime loans have higher interest
rates. The rate is based on "risk-based pricing," which means that
the mortgage's rates and terms are tailored to your circumstances.
What goes for one person may not go for you.
But what you can be sure of is that the lower your
credit score, the smaller your down payment and the higher the
number of late payments and delinquencies, the higher your interest
rate will go.
A subprime mortgage will probably come with a
prepayment penalty and a balloon payment, or both. The prepayment
penalty is a fee that will be assessed against you if you pay off
the loan early. This happens when you either make extra payments to
the principal, refinance for a lower-rate mortgage or sell the home.
A mortgage with a balloon payment requires the
borrower to pay off the entire outstanding principal in a lump sum
after a certain amount of time, say five years. If the borrower
can't pay the entire amount, he or she will have to refinance the
loan or sell the property.
Many experts say that prepayment penalties and balloon
payments are associated with higher foreclosure rates. The subprime
industry says that borrowers receive the opportunity to own a home
at reasonable rates in exchange for prepayment penalties and balloon
Watch out for predatory lenders
Subprime borrowers must watch out for predatory
lenders who are looking to cheat those who are desperate. There are
several tactics these lenders use, often using several at a time.
Some lenders charge outrageous fees to the uneducated borrower,
telling the borrower that his or her score is lower than it really
Many predatory lenders will pressure homeowners to
refinance the mortgage frequently. They charge high closing fees for
refinancing and roll the costs into the mortgage amount. Over time,
the amount owed exceeds the value of the property. Other lenders
issue loans without taking into account the borrower's ability to
repay it. After all, if the borrower defaults, the lender forecloses
and sells the property, often for a profit.
Ethical mortgage lenders do not want to foreclose on a
property, because they know that foreclosure is a money-losing
process in the long run. Lenders make the most money by charging
interest and having mortgages paid in full. A predatory lender
simply profits by collecting closing fees over and over again, and
then ends up selling the house.
The best way to protect yourself is to be
knowledgeable. Find out your credit score before shopping around for
a mortgage. Ask your friends and relatives for who they would use.
If you find you need a subprime lender, ask your local bank who they
would recommend. Make sure you comparison shop and don't get
desperate. Take your time and find the best mortgage for