Subprime Mortgages - Information
Undoubtedly, you've heard the radio commercial claiming you can
get a mortgage despite having bad credit. Bad credit mortgages
are better known as subprime mortgages.
Subprime
"Subprime" is a euphemism for a borrower who simply doesn't
qualify for a traditional home mortgage. Subprime loans used to
be very difficult to get, but things changed in the 1990's.
Banks began to realize there were a lot of borrowers with less
than stellar credit or other problems. More borrowers meant more
revenues, so banks started creating subprime mortgages and the
game was on. As a result of these new loans, home ownership in
the United States has risen to all time highs.
One of the biggest determinants in qualifying for a loan is your
credit score. A borrower's credit history is analyzed using a
"FICO" score, named after Fair Isaac and Company, Inc.
Generally, a FICO score below 620 is considered an indication of
bad credit. The borrower is then classified as a subprime
borrower.
Importantly, a FICO score below 620 is not the only reason a
person may be classified as subprime. An infrequent borrowing
history, new employment position or expensive home may also key
the designation. In fact, nearly 50 percent of subprime
borrowers have FICO scores above 620.
When a lender writes a mortgage, it is betting on whether the
borrower will repay the loan completely and in a timely manner.
The better your credit score, employment history and so, the
better deal you will get from the lender. Obviously, subprime
borrowers aren't going to get the best deal. Instead, a lender
may require a larger down payment and will certainly designate a
higher interest rate than given to "good" borrowers. In
addition, subprime borrowers may have to pay points just to get
the loan.
The trade off of all of this, of course, is that you get a loan
to buy a home. Home ownership has consistently proved to be one
of the best long-term investments in the United States. While
Americans are criticized for failing to save money, they are
effectively doing so by purchasing homes and building equity in
them.
Should you apply for a subprime loan if you have less than
stellar credit or other problems? There is no right answer, so
you should consider sitting down with an independent mortgage
broker to analyze your situation.