After 2008, subprime mortgage lenders have received a lot of bad publicity. Many people may not even realize they have subprime mortgages, because lenders typically don't advertise them that way. What is a subprime mortgage, and how can you avoid it?
What is a subprime mortgage?
A subprime mortgage is a mortgage granted to a borrower who doesn't qualify for a prime mortgage. Practically speaking, subprime mortgages go to people with low credit scores who cannot qualify for traditional mortgages. If your credit score is below 600, you'll have trouble qualifying for a traditional mortgage, and you are likely going to end up with a subprime mortgage. If your credit score is in the 600 to 700 range, you may qualify for prime loans, or you may still end up with a subprime mortgage.
How can you avoid a subprime mortgage?
Unfortunately, if you have a low credit score or a poor credit history, you're likely to end up with a subprime mortgage. The only way to avoid it is to go with non-traditional financing and work to improve your credit so that you can eventually qualify for a prime mortgage.
If you have mid-range credit scores, you can avoid a subprime mortgage by having a high down payment or buying a home with a low debt-to-income ratio. If your expenses are low and your income is high, and lender is more willing to take a risk on you by issuing a prime loan instead of a subprime mortgage. The same holds true if you can afford a high down payment.
Look for lenders who offer both prime and subprime mortgages: Lenders want you to pay interest for years, so they are always going to try to find a way to lend you money. If you go straight to subprime mortgage lenders, you're going to get a subprime mortgage. It's all they offer, and they'll work hard to qualify you so that you borrow with them.
However, if you go with a lender that offers both prime and subprime mortgages, you might stand a chance of getting a prime loan. A lender who offers both should try to qualify you for a prime loan first, and then send you to the subprime mortgage department if you fail to qualify. You miss out on the opportunity to qualify for a prime loan if you go straight to subprime mortgage lenders.
Carefully evaluate subprime mortgage lenders: If you do have a low credit score, a high debt-to-income ratio or can't afford a big down payment, you might be stuck with a subprime mortgage. However, that doesn't mean you have to let subprime mortgage lenders take advantage of you.
Don't take the first subprime mortgage offer that comes along just because you know you're financially challenged. Shop around for subprime mortgage lenders just as you would for a regular mortgage. Look for a subprime mortgage lender who offers competitive rates and low fees, with a good loan servicing history.
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