Subprime Financing Advice
Before my financial problems, I never would have pictured myself applying for a subprime mortgage. Then, a little over two years ago, I nearly lost my house. My wife became ill just one month after we sent our daughter to her top-choice college. I quickly came to the realization that we wouldn't be able to make all the ends meet.
I brought my daughter home from school, but just as we were getting back on track, I was laid off from my company, and that's when the bills really started piling up. Luckily, I found a fairly comparable position with a new company in a little under four months. Unfortunately, the bulk of the damage to our credit had already been done. With two or three 30 to 60-day late payments as well as repossession of one of our vehicles showing up within the last year, I was sure I didn't even want to know what my credit score looked like.
After 90 days at my new job, I got a decent raise, enough to arrange for my daughter to go back to college at the beginning of the next semester. A few months into the new school year, she called me with a request. A small house in the campus area was for sale, and my daughter thought purchasing it would be a good way to build her credit, but she would need me to co-sign on the house. I realized, as we were discussing it, a mortgage on a second home could also help me build my credit back up if I made all payments on time. It meant something else too. I was going to have to look at my credit score.
My daughter had no credit history, and with my damaged credit, I knew I wouldn't be approved by a traditional mortgage lender. I needed to research subprime lenders who would be willing to finance what my daughter had in mind. While I knew that rates on conventional mortgages varied little from lender to lender, I had heard that
subprime mortgages were quite a different story, and comparison shopping could make all the difference in the world on the money I would spend in fees and interest.
I found quite a few different options for subprime mortgages. Some offered introductory or "teaser" interest rates that would increase after the first two years. Several featured interest-only payments for a few years after which the loan would revert to a regular principal-and-interest, monthly payment. Another option involved lower payments with one large balloon payment at the end of the loan term. The majority of the deals involved a pre-payment penalty, meaning if I sold the house or refinanced the loan before a certain point in the loan term (most often two years) I would have to pay a penalty amount to the lender. And across the board, rates and fees on all the subprime mortgages were higher than for mainstream mortgages.
I got my credit score free from one of the credit bureaus and found that is had recovered to nearly 590. I knew that must be better than where it had been six months prior, but I also knew that with a score under 620, I would indeed have to use one of the subprime mortgage lenders
I'd been researching. I chose a program called a 2/28 adjustable rate mortgage (ARM). With my 2/28 ARM, I would receive a fixed rate for two years, after which, the rate would increase to an adjustable rate based off of prime plus a margin. I was attracted to the lender I chose, because their pre-payment penalty lasted only for 18 months, giving me the opportunity to refinance after some of my on-time payments pulled my credit score higher. I made sure the lender knew that I planned to be requesting my annual free credit score from one of the three credit bureaus every four months. That way, I could be sure that my on-time payments were being reported and that my credit continued to improve with proper payment of my new subprime mortgage.
As the months went by, my credit continued to improve. Next month, my wife will celebrate one year with no relapses of her condition, and my daughter will start on her junior year in school. Though I remember all the steps we've taken, it seems like recovery has come all at once. While taking out a subprime mortgage would never have been my first choice for a step in that process, I can't deny the positive effect it's had in helping my family get back on its feet.