Subprime Mortgage Loan | Discover The Basics Of Subprime Mortgage Loans
A subprime mortgage loan is reserved for borrowers whose credit score is less than 620. The good news is that there are still mortgage companies that dedicate themselves to these bad credit loans. Therefore, as a borrower, if your FICO score falls below 620, you have a good chance of qualifying for a subprime loan, as there are numerous lenders to choose from.
Since your credit score is lower, the lender is assuming a greater risk by granting you the loan. To compensate for this risk, you will be required to pay somewhere between one and two percent higher interest for the mortgage.
Subprime Mortgage Loans & Rates
As far as the future of the subprime market goes, rates reach numbers a bit higher than recent trends might suggest. The refinancing boom that took place between 2002 and 2005 featured nearly 80% of Americans refinancing the mortgages on their homes. As a result, adjustable loan interest rates dropped just below four percent, and fixed rate mortgage loans just under five percent. Post-boom rates are currently back up near seven percent for a 30-year fixed rate mortgage, and upwards of nine percent for a subprime mortgage. For the most part, homes stay on the market about six months, with a rate of appreciation falling between six and twelve percent annually. This means that the market is balanced, and neither buyers nor sellers are favored in a transaction.
It is recommended that subprime borrowers, because of their credit status, refinance their home mortgage loan if they want to be able to cash out some equity. Depending on the borrower’s financial circumstances, he or she may be able to borrow as much as 95% loan-to-value, but generally anywhere in the 75%-85% range in more practical. It is also wise for a subprime borrower to do his/her homework by researching various lenders, and choose the one that can cater to his/her specific situation. This lender should be flexible in their terms and conditions, and also offer affordable solutions.
As a borrower, you should check your credit score before delving into the application process. Freddie Mac, the government loan agency, reports that almost 15% of the subprime borrowers could also qualify for a traditional loan. In other words, if you can obtain traditional interest rates, do not settle for the higher rates that accompany a subprime loan.
Be aware of your costs as well. With a subprime mortgage loan, interest rates do not vary all that much, but there are certain variables which contribute to the overall cost of the loan. These include the tenure of the mortgage, the type of loan (fixed or adjustable), prepayment points, and processing/closing costs.
Finally, make sure that your mortgage lender is the right one for you. A trustworthy lender will guide the client through the entire process, making sure that all terms and conditions are clear and understood prior to signing any documents. All processing and closing fees should be disclosed, and the lender should give you some guidance as to what type of interest rate would be best for your personal situation.