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Should You Get A Sub- Prime Loan For Your Mortgage

Dec 16, 2007
A sub-prime loan lender is a lender who lends money to borrowers who do not qualify for loans from mainstream lenders. Often these lenders are independent, and yet more are affiliate with prime lenders operating under different names.

The only clear giveaway are their prices, which are higher than those quoted by mainstream lenders. It is definitely to your advantage if you quality to go with a prime lender no matter what a sub-prime lender might tell you.

Sub-prime lenders base the rates higher the lower your credit scores are and the smaller the down payment is. The entire structure of rates and fees is higher to cover the risk of sub-prime lending.

If you fail to qualify for prime financing due to low credit scores you should then consider a sub-prime loan. A very low score will certainly disqualify you. A middle score might or might not, depending on the down payment, plus your income and assets.

The purpose of the loan and the property type could make the difference. For example, if the borrower is weak in some factors he could make it if he was purchasing a one-bedroom home, but if he were purchasing a four-bedroom home he would not qualify.

And other type of borrower for this type of loan is someone with poor credit scores. They apply for an adjustable rate mortgage on which the rate is fixed for two years, and then rises sharply. The trick is to refinance before the two-year mark.

The major threat to such a plan is a prepayment penalty that runs past two years and a lender fails to report their payment history to the credit agencies. Borrowers should be on their guard against both.

The development of the sub-prime market has made mortgages and home ownership available to a segment of the population that otherwise would have been shut out of the market. That's good news.

The bad news is that some borrowers who are eligible for loans from the prime lenders can end up in the sub-prime market and pay sub-prime prices.

Sub-prime lenders market aggressively to homeowners who already have mortgages. A major pitch is the cash the borrowers can take out of their properties through a cash-out refinance.

Also, lower payments are possible on interest-only mortgages and the option ARMs that are a gamble, which usually end up in a heavy loss. A higher percentage of sub-prime loans than of prime loans go into default.

Sub-prime lending costs are also higher because more applications are rejected and marketing costs are higher.

The best advice is to keep your credit score high, save for a deceit down payment, have little or no bills and go with a responsible prime or mainstream lender with a good reputation.
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