Subprime Mortgages: a must to avoid
Article by John B Galt
As a rule of thumb, a subprime mortgage is a home loan to someone with a credit score below 620. As the incentive for a borrower to refinance a subprime mortgage is high, many subprime mortgages have prepayment penalties. The best way to avoid a subprime mortgage is to have a prime credit rating. Many times the compensation a lender receives for a subprime mortgage is greater than that which is received for a conventional mortgage. The advantage of a fixed rate subprime mortgage is that you know exactly what your mortgage payments will be during the period.
Mortgage loans in excess of 80% of the property’s value must have default insurance, protecting the lender from loss. Mortgage-backed securities are packages of home loans, either subprime or not, that are sold to investors. Mortgage brokers do not get a fee from the lender unless they get you a mortgage. Mortgage companies use ratios to analyze your mortgage payment.
Credit score requirements are being raised and underwriting guidelines are toughening up for these types of loans. Credit problems will cause lenders to offer you a different, more costly and potentially more risky. Credit spreads, bond prices, currencies and equities would all behave in an unpredictable manner. Credit unions always offer the best rates for mortgages. Credit problems are rampant in the United States.
Loans in default and/or foreclosure will be almost impossible to refinance unless you have 50%, or more in equity. But some lenders count loans as subprime even if the borrowers have credit scores of 660 or higher, if the borrower makes a down payment of less than 5 percent or does not document income or assets. To get a conforming (or conventional) loan, borrowers must conform to rigid standards developed by mortgage lenders. If you do not qualify for a conforming loan, it should be a warning sign. About 20% of consumers have scores in this range and subprime loans have accounted for about that percent of all mortgages the past couple of years.
Because subprime borrowers present a higher risk for lenders, subprime mortgages charge interest rates above the