The era of subprime loans appears to be have solidified in 2018. Typically when the trend of interest rates points upward brokers and lenders start rolling out more subprime loan programs in an effort to help meet the growing financing demands of homeowners who rest “outside of the box” of mainstream guidelines. Last year we saw a dramatic amount of new subprime loan offers being advertised and the consensus so far is that, these freshly re-branded subprime home loan programs have been performing in portfolios. That means that borrowers that took out subprime loans last year have been making their payments on-time and the defaults have been lower than in the past.
Owning a home is one of the most important parts of enjoying the American Dream. If you want to buy a home, you will most likely need to take out a mortgage.
A decade ago, there were many aggressive lending practices as the housing market boomed. This led to some borrowers getting subprime mortgages that they could not afford, and this led to the housing market crash. Many of those loans that went bad were called subprime loans.
While many subprime mortgage loans of that day are no longer around, there are still some subprime programs that are useful. If you have less than perfect credit, foreclosures, bankruptcy or unsteady income, you could have more difficulty getting a loan today.
But you should feel encouraged as the Trump administration plans to make it easier to get a loan than has been the case in the last five years. While ‘subprime’ loans today have stricter standards than a decade ago, you still may be able to get such a loan, and this fact may have contributed to salvaging the mortgage and housing industry in 2017.
Here are some reasons why:
#1 Subprime Loans Require a Down Payment
There was a time when you could get a subprime loan with a zero-money down mortgage. You also could get your mortgage without proving your income.
Today, there are subprime loans for people with average credit, but you will need to put down at least 3% and sometimes 5%. While this makes it a bit tougher to buy a home, we think it is a good idea. People who have a bit of skin in the game in their home are less likely to have the house foreclose.
For example, you can get an FHA or Federal Housing Administration loan for only 3.5% down. You also can have a low credit score of 600 and still get approved for a low rate because the loan is backed by the US government.
It isn’t as easy to get a FHA loan now as you do have to come up with 3.5% down, but we argue if you can’t afford 3.5% down, why are you buying a home anyway?
#2 Most Subprime Loans Require People to Document Income in Some Manner
There are plenty of subprime options available such as FHA, VA and USDA, but you will need to fully document your employment, debt and income.
You might think it strange for us to argue that it is a benefit to have to prove your income and debts. But again, we believe that people should have to show that they really can afford a subprime home loan. The last thing you want is to sign up for bad-credit mortgage loans that you cannot afford, lose your home and have your credit wrecked.
By having to document your income and prove you can make the payments, you will be better set up for long term financial success. If you would rather not show the underwriter your income documentation then ask about your eligibility on no-doc loans.
#3 Interest Rates Are Still Low
While interest rates on mortgages have edge up significantly since 2016, the rates are still quite low. With averages for mortgages in the low 4’s, people who are getting a subprime mortgage will still be able to get a fair rate.
It is not necessarily true that you will have to pay a lot higher for your mortgage with poor credit, as well. As we noted earlier, you can often be eligible for a subprime loan with poor credit insured by the FHA and you may be able to get a very low interest rate.
#4 Debt to Income Ratios Are Loosening
After the mortgage crash, lenders typically wanted to see lower debt to income ratios to approve a mortgage. Now things are starting to loosen again. With some mortgages, such as FHA, you may be able to be approved with a debt to income ratio as high as 50%.
#5 There Are More Subprime Loans Today
You were completely out of luck for a higher interest, subprime loan in 2009. Today there are more options available. We advise that you check with several subprime mortgage brokers to determine if one of them can help you to get a mortgage at a reasonable rate.
#6 Owner Financing Will Become Easier
If you are not able to be approved for a traditional bank loan, you can also get a seller financed or owner financed property. These loans are at a high interest rate but should be easier to qualify for as many of the Dodd-Frank restrictions are being eased during the early part of the Trump administration.
For the last several years since the crash, it has been possible to get owner financing, but Dodd-Frank rules have made doing these deals more complicated. It was required for the seller to prove that the borrower can pay for the loan. While this will still be true, we think that the requirements under the revised Dodd-Frank law will not be as onerous.
This will likely allow more owner financed deals to go through, which could be a great help to people with poor credit.
#7 Credit Will Loosen
You can get a loan with FHA today with a 580 to 600 credit score, and we think other types of mortgages, including subprime loans, will have looser credit criteria for 2018. This should be of help to the self-employed who may not have as good documentation of their income, especially if they have credit problems.