If you have bad
credit, you may not qualify for a conventional loan or low down
payment loans offered by FHA and VA. In this case, you may consider
a subprime mortgage. Because of the higher risk associated with
lending to borrowers that have a poor credit history, subprime loans
typically require a larger down payment and a higher interest rate.
You should study the specific terms of a subprime loan
that you qualify for to determine if it is a loan that will help
your financial situation. Subprime loans are one way for you to get
into the home you want at today's price. If you already own a home,
a subprime loan can give you an opportunity to clean up your credit
and ultimately refinance into a lower rate at a later time. If you
have a mortgage, you can look at refinancing more than what you
currently owe on the house and get cash back for the equity you
already have in the home. This cash out could be used to pay off
higher rate credit cards, bankruptcy,
foreclosure or collections and liens. It could be a good way to
clean up a troubled credit history, save money each month and start
rebuilding your credit worthiness.
Whether for a
purchase or refinance, subprime loans should typically be used as a
short term solution, approximately 2-4 years. During that time, you
can work to clean up your credit and qualify or a refinance into a
lower risk, lower rate loan.
Prior to 1990 it was very
difficult for anyone to obtain a mortgage if they did not qualify
for a conventional, FHA or VA loan. Subprime loans were developed to
help higher risk borrowers obtain a mortgage. Many borrowers with
bad credit are good people who honestly intended to pay their bills
on time. Catastrophic events such as the loss of a job or a family
illness can lead to missed or late payments or even foreclosure
and bankruptcy. Now there are mortgage companies that take into
consideration events outside the borrower's control, but not without
a price.
Lenders are compensated for risk in the form of
interest rates. The higher the lender perceived its risk to be, the
higher the rate they will charge for the privilege of borrowing
their money. The lower the risk, the lower the rate. Several risk
factors are taken into consideration when evaluating a borrower for
a subprime mortgage, the most important being your payment
and credit history.
Your debt to income level,
employment history, type of property and assets are other factors
that are taken into consideration when determining if you qualify
for a conventional, government or subprime loan.
