Subprime mortgages are considered home loans that have a higher interest rate than prime loans – were very popular prior to the mortgage crash. After 2009, many subprime loan programs were no longer available. These days, it is much easier to get a subprime loan than just two or three years ago.
With the election of Donald Trump as our next president, it seems likely that there will be more subprime loan options for people with bad credit in 2017. If you are considering getting a home loan and have poor credit, we should explain some of the details of subprime mortgage loans:
What Are Subprime Mortgage Loans?
A subprime loan has a higher interest rate than a regular mortgage loan, because the person taking out the mortgage has a lower credit score and/or a higher debt to income ratio. Also affecting the rate on subprime mortgage loans is the number of late payments you have made that appeared on your credit report in the last few years. If you get a subprime loan, there are several things to be aware of. First, your interest rate will be higher, causing you to pay more in interest over the life of the loan.
Here are some examples of Subprime Mortgage Products:
- Refinance Mortgage with Bad Credit
- Hard Money Loans
- FHA Loans for People with Low Credit Scores
- Subprime Mortgages with Limited or No Income Documented
Also, a person with a subprime mortgage loan is more likely to have a balloon payment at the end of the loan term (often five or ten years), and a pre-payment penalty in some cases. A pre-payment penalty is a fee that is assessed for paying off your loan before the term is over. Although there are downsides to getting a subprime loan, these types of mortgages are poised to make a comeback in the next few years. Here are some reasons why:
#1 Subprime Loans Can Be Obtained with Bank Statements
After the crash, the subprime market largely dried up, but things began to change in 2015. There are now mortgage lenders available that are especially catering to people with lower than average credit, as well as borrowers with self-employed income.
Specifically, a company named Citadel Servicing Corp., based in Irvine CA, started to offer alternative income documentation loans in 2012. It has created a loan program that allows the self-employed borrower to document income with bank statements rather than tax returns and 1099’s. These self-employed loans seem like a solid common sense approach for good borrowers that might need bad credit loans because of past problems they have overcome.
This subprime mortgage company requires you to have two years of bank statements to validate your cash flow so that they can extrapolate your income. This will give the lender the ability to judge your ability to repay the loan. This company, and others like it, think that looking at two years of bank statements are a more reliable way to judge what you live on each month, rather than W-2’s and tax returns.
#2 FHA Has Loosened Borrowing Standards
After the crash, having 20% down to get a home loan was standard. But today, the Federal Housing Administration is guaranteeing loans with as little as 3.5% down, and you can have a credit score as low as 620 for that type of loan. If your score is below that, you will need 10% down. Still, FHA has relaxed its lending criteria so that people who have below average credit are able to get home loans. Over the years FHA has built a reputation insuring affordable mortgages for people with bad credit scores.
#3 Stronger Economy Could Goose Housing Market
With the election of Donald Trump to the White House, there has been a surge in activity on Wall Street and the Dow has gone well over 19,000 – a record. If the economy shows strong growth in 2017 and beyond, this will be a boon to the housing market.
When there is a stronger housing market, there are usually more subprime mortgage lenders that want to get into the game. However, more than 50% of Americans have a credit score under 680, which is well into subprime territory. The only way for many of those buyers to get a loan is with a subprime mortgage program.
#4 Interest Rates Should Stay Low on Subprime Mortgages
There is a good chance that the Fed will raise rates in December 2016, but historically, getting a mortgage for 4-5% is still a great deal. For subprime borrowers, they will be required to pay a higher interest rate, but this will still be better than paying rent for most borrowers. Subprime mortgage loans will still be a comparatively good deal for many of these buyers.
#5 Low Down Payment Loans Becoming More Common
There is no doubt that lending guidelines have relaxed a good deal. This has led to a lower down payment requirement for many first time home buyers. Even for many borrowers with a credit score of 620 to 640, it is still possible to get a loan for 5% down, or 3.5% down for an FHA loan. Fannie Mae and Freddie Mac recently rolled out new home loan programs that only require a 3% down-payment, but these program are seeking a strong credit history than FHA underwriters would be in most cases.
Many people believed that with the subprime mortgage crash, it would be impossible to get a loan with less than 20% down or a credit score under 740. This is no longer the case. You will need to show that you have the ability to repay the loan, but there are many subprime mortgage opportunities available for people who know where to look.