What is Subprime Mortgage Lending?
Many people do not know exactly what is subprime mortgage lending.
Here is a good look at what subprime mortgage lending is and how
it started to be blamed for the real estate woes we are seeing today.
What is subprime mortgage lending? This is where a mortgage is
given to a borrower who has questionable credit. The subprime
lender charges a higher rate to compensate for the higher risk
of default. A subprime borrower is a person who has a FICO score
under 680 and has collection accounts, past due accounts, missed
and late payments on their credit report.
Subprime lending is geared toward people who had credit problems
in the past but are now in charge of their finances. That was the
original intent of subprime lenders. Now it has evolved into something
very different. The subprime
market includes standard fixed rate loans as well as many gimmicky
and questionable loans. It is these non-standard loans that are
getting many people into trouble.
For a very long time subprime lending offered the traditional 30
year fixed rate mortgages and ARM or adjustable rate mortgages.
If you could not come up with a down payment of 20% of the selling
price, Private Mortgage Insurance or PMI was added to your loan
to protect the lender in case of default. You still had to prove
income, assets and show financial responsibility to qualify for
a loan.
What is subprime mortgage lending today? It is an industry that
is changing. Subprime mortgage lending today includes 80/20 loans,
interest only loans, liar loans, and ARMs that offered a very low
introductory rate that quickly readjusted to a much higher rate.
All of these loan types have helped to create
a huge problem for everyone. Let's look at each of these loans
briefly.
The 80/20 loan. One way for a homeowner with little or no down
payment to buy a home. In order to avoid having PMI added to a mortgage
and then the buyer will not qualify due to the higher payment, some
subprime mortgage lenders offered they buyer an 80% ARM loan combined
with a 20% home equity line of credit. They offered the ARM at a
low introductory rate and charged a significantly higher rate on
the home equity line of credit. The buyer then has no equity in
the home at the time of purchase and the seller forgoes the protection
of PMI.
Interest only loans are mortgages that are offered to subprime
borrowers who cannot afford large monthly payments. On these loans,
sometimes referred to as negative amortization loans, you only make
the interest payment every month. Nothing is paid toward the principle
of the loan therefore the loan actually gets larger every month.
At the end of the loans term, there is potentially a huge
balloon payment that must be made.
Lair loans as they are referred to in the industry are loans that
are advertised as no income check required. These loans were popular
for a while when money was easy to get in the subprime mortgage
market. Changes in market conditions have eliminated this type of
loan today. You could state whatever you wanted to as income and
many did. There was no verification of income hence the name liar
loan.
The ARM with a low introductory rate is still a favorite loan of
the subprime mortgage lender. These loans start out with a low rate
and usually adjust upward within 2-5 years as the rate resets. ARMs
have been used by subprime mortgage lenders for many years.
We have discussed what is subprime mortgage lending. Now you know
that it is a way for people to get loans when their credit is not
good and that there are lenders
who specialize in this type of loan.
| 