Subprime Mortgage Lenders: Do you really need them?
Subprime mortgage lenders fill a gap in the market for borrowers who did not meet the standard underwriting. However, since the 2007 housing burst subprime mortgage lenders are a rare commodity. The abuse of big banks and the mass sale of bad subprime loans to the secondary market greatly reduced the supply of subprime loans.
For some borrowers, a subprime loan may be there only alternative. You may be such a borrower, who cannot provide sufficient documentation to qualify for a conventional loan, or even an easier to qualify FHA loan. Mortgage lenders set up their own underwriting requirements. In addition, lenders often sell the loans to the secondary market and must follow underwriting requirements set by the secondary market and institutions such as Fannie Mae or Freddie Mac.
Subprime mortgage lenders fill an important gap in the mortgage market. However, it comes at a higher price. Before you shop for a mortgage-loan and approach a subprime lender learn about:
- The types of borrowers who should talk to subprime lenders.
- Subprime predatory lending – stay away.
- Shopping for a subprime lender and mortgage
The types of borrowers who should talk to subprime lenders.
Certain borrowers cannot meet the minimum requirements for a conventional loan because:
- They are self-employed and have trouble documenting their income.
- They had debt problems in the past, but now have good solid income.
- They have strong compensating factors, but don’t meet maximum DTI requirements.
- They have very low LTV but poor credit and income.
Remember, a subprime loan is a high-risk loan. Subprime mortgage lenders, like any lender, evaluate the risk of the borrower defaulting and charge higher interest rates and fees for the higher risk.
Many borrowers believe that they can take a subprime loan to get into the market, build up their credit, and refinance their mortgage loan at a lower cost. For some this is possible, however it is not a sure bet. In the meantime, you are paying high upfront fees and interest costs, and paying off a small portion of your balance. Today, many subprime borrowers are delinquent in their payments and/or underwater with little or no help available.
Subprime Predatory Lenders: Stay Away
Many subprime lenders targeted weak borrowers and sold high interest subprime loans, instead of offering better alternatives. Due to the boom in real estate prices until 2007, the general feeling was that if you can’t pay for the loan, then sell the property and walk away with a bundle. We all know that the housing market, just like all markets, fluctuates and the risk of a declining market exists.
Some subprime lenders are legitimate and offer higher priced loans to high-risk borrowers. However, a lender should evaluate your potential to repay the loan. Both you and the lender should feel comfortable that you can make the payments. If the lender is making a hard sell, and pushing an expensive mortgage product, with high upfront fees, then beware – predator lender ahead!
By educating yourself and preparing for the mortgage market you can avoid the pitfalls of subprime loans.
Shopping for a Subprime Lender
My first advice is not to start your mortgage shopping with a subprime lender. If you are not able to meet the mortgage requirements of a conventional loan or a FHA loan, then you probably shouldn’t be in the mortgage market at all.
If you need to find a subprime lender, then speak to a mortgage broker who specializes in that market. A good broker will help you analyze your situation and take the best loan available. However, before you speak to the broker, educate yourself. I recommend that you take these steps:
- Learn how to qualify for a conventional loan.
- Learn about the mortgage rates for a conventional loan. Shop around for a mortgage and try to get pre-qualified. If you are turned down, learn the exact reasons for the denial.
- If your credit score is too low, then learn how to improve your credit score.
- If you are self-employed and your income is to low, then speak to your accountant. It may be worthwhile to pay higher taxes in order to qualify for a mortgage loan.
- If your DTI ratio is too high and you have debt problems, then learn about debt relief solutions.