Subprime loans were the bane of the last financial downturn. The Subprime mortgage product, which are home loans to people with poor credit, low down payments and little verifiable income, were partially responsible for the mass of mortgage defaults that left the US and world economy reeling in 2008.
After the housing crash, subprime mortgage products disappeared, but now, 10 years later, subprime loans are making a comeback. They are often referred to as non-prime or subprime loans.
For example, Carrington Mortgage Services recently announced an expansion into non-prime loans. It is offering loans to borrowers with less than perfect credit, according to its website. Carrington is originating and servicing these loans, but it is also selling them to investors.
According to Carrington, the company believes there is a strong demand in the secondary market for people who want to buy non-prime mortgages and no-doc loans, as long as they have been correctly underwritten. The company noted that it does not underwrite loans if people have no job or income and little in assets.
All Non-Prime Mortgage Loans Not the Same
Carrington Says that its non-prime loan offerings will each be manually underwritten to assess properly the risks of each application. It will allow borrowers to have a credit score as low as 500 with an FHA loan. The current average credit score for people with Fannie and Freddie backed loans is in the mid-700s.
With non-prime lenders such as Carrington, borrowers can get loans up to $1.5 million on a single-family home, condominium or town-home. They also may do a cash out refinance up to $500,000. You can even have a recent foreclosure or bankruptcy. Late payments in the past are OK, but it is important to show in the recent past that you are paying your bills on time. Income needs to be fully documented.
Carrington notes that not all non-prime loans will be the same for each borrower. If the borrower represents a higher risk, you may need to make a higher down payment. And the rate will probably be higher.
Carrington is not the only lender in this space. Angel Oak also started to offer and securitize nonprime loans in 2016 and has done several non-prime loan securitizations to date. The company recently finalized its largest securitization so far at $329 million with a total of 905 mortgages with an average loan amount of $363,000. More than 80% of these loans qualified as non-prime mortgage products.
Investors in the non-prime loans at Angel Oak are big players on Wall Street, including hedge funds and insurance companies. The securitizations for the company now total more than $1.3 billion in mortgage debt.
Angel Oak, and also Caliber Home Loans, have been the major companies in this space, and demand is rising. Big banks are also getting involved in the non-prime loanspace. There are a lot of people with large amounts of private capital that have been out of the mortgage markets that want to get into it. As long as the risks are properly managed, and underwriting is done right, then it is a great investment opportunity.
The reason that investors want into this space is that there is so much demand. The economy is improving, and rents are rising. So are home values and interest rates. More Americans want to be home owners, but many of them have poor credit from the last recession. Approximately 20% of consumers today have low credit scores and they are disqualified from getting a loan from a conventional lender.
A spokesman for JFQ Lending said, “The government home financing remains aggressive with non-QM loan programs and the pricing is very competitive.” They are not the only finance company taking advantage of government-backed loan programs, but they built a strong reputation across the country for great service and discounted lending services.
According to CNBC, subprime loans are being revived across the country. However, even Fannie Mae is starting to make it easier for people with a low credit score to get a home loan. In 2017, Fannie Mae said that it would relax lending standards for some prime loans. It allowed borrowers with more debt and lower credit scores to get loans without having more down payment or more cash in the bank.
Fannie Mae also raised its DTI limit from 45% to 50% so that people with more debt could still qualify. Learn more about the Fannie Mae Home-Path Loan option.
The bottom line is that the subprime mortgage market will never come back as it was in the early to mid-2000s. All mortgage loans written in the US need to have proper underwriting, and income and job needs to be verified. But non-prime loans are becoming more popular because there are so many consumers with average to poor credit who want to buy a home. If you are looking for a home loan and have a credit score well under 700, there is hope. Talk to your lender about a nonprime loan option today.