It's fair to say that before the 2007-08 real estate crash which triggered an investment banking meltdown and the Great Recession, very few people knew anything about subprime mortgage lending. Now everyone knows the dangers, but it's still a mysterious product which not many home-buyers understand clearly. Let's shed some light on this product and take a look at the pros and cons.
In a nutshell, it is a high-interest loan offered to customers with a less than desirable credit history and rating, who would otherwise not qualify for a traditional home loan. In order to balance the higher risks, lenders use a product such as an adjusted rate mortgage (ARM) to charge rates higher than the prime lending rate. Home buyers do not have to provide additional security, and the down payments required are much lower than for comparable conventional mortgages.
The meltdown had such a widespread impact because these risky loans were packaged as mortgage-backed securities (MBS) by the lenders and sold to investors. The packaged securities were cleaned up along the way and sold as safe investment products with the help of credit rating agencies. The good ratings offered to MBS packages swept under the carpet the risks associated with defaults by homeowners.
When the market crashed and property values dropped, the foreclosures hit home and the MBS investments turned out to be worthless. It wiped out billions in investments made by people who had no direct connection to the properties, borrowers or lenders. Money was pulled out of all such tainted securities, and a massive credit crunch ensued.
For subprime lenders, the scrutiny and the losses led to harsher regulations and a much higher bar is now set for those who want to obtain these loans. For instance, the required down payments have been increased and the amount of loan offered as a percentage of property value has decreased. This ensures that mortgages do not go underwater. Other practices such as second mortgages and equity financing which contributed to the crash have also been curtailed a lot.
But it is still possible and feasible under certain conditions to obtain subprime loans. It's a good option for people who lost their homes during the crash, and are now looking to buy a new home despite the adverse impact of the foreclosure on their credit history. Another category is the set of people whose credit was downgraded after they lost their jobs during the recession, but have since found suitable employment and are now in the market as home-buyers.
The best way to proceed with getting a loan is the tricky part. The cut-off point (a credit score of 600) where traditional mortgages dry up and the only option is a high-interest loan remains the same. But sub-prime lenders no longer advertise their products openly. Most of their business comes through referrals from traditional lenders who must refuse bad credit applicants, but can redirect them to a sub-prime affiliate or partner.
A home buyer looking for a suitable subprime mortgage lending company must therefore shop in the same manner as anyone else. Get in touch with several lenders and shop around for offers. Even if everyone refuses, it's likely that one or more lenders will have an affiliated sub-prime lender willing to take on the risky proposal and approve it with a low down payment.
In a nutshell, it is a high-interest loan offered to customers with a less than desirable credit history and rating, who would otherwise not qualify for a traditional home loan. In order to balance the higher risks, lenders use a product such as an adjusted rate mortgage (ARM) to charge rates higher than the prime lending rate. Home buyers do not have to provide additional security, and the down payments required are much lower than for comparable conventional mortgages.
The meltdown had such a widespread impact because these risky loans were packaged as mortgage-backed securities (MBS) by the lenders and sold to investors. The packaged securities were cleaned up along the way and sold as safe investment products with the help of credit rating agencies. The good ratings offered to MBS packages swept under the carpet the risks associated with defaults by homeowners.
When the market crashed and property values dropped, the foreclosures hit home and the MBS investments turned out to be worthless. It wiped out billions in investments made by people who had no direct connection to the properties, borrowers or lenders. Money was pulled out of all such tainted securities, and a massive credit crunch ensued.
For subprime lenders, the scrutiny and the losses led to harsher regulations and a much higher bar is now set for those who want to obtain these loans. For instance, the required down payments have been increased and the amount of loan offered as a percentage of property value has decreased. This ensures that mortgages do not go underwater. Other practices such as second mortgages and equity financing which contributed to the crash have also been curtailed a lot.
But it is still possible and feasible under certain conditions to obtain subprime loans. It's a good option for people who lost their homes during the crash, and are now looking to buy a new home despite the adverse impact of the foreclosure on their credit history. Another category is the set of people whose credit was downgraded after they lost their jobs during the recession, but have since found suitable employment and are now in the market as home-buyers.
The best way to proceed with getting a loan is the tricky part. The cut-off point (a credit score of 600) where traditional mortgages dry up and the only option is a high-interest loan remains the same. But sub-prime lenders no longer advertise their products openly. Most of their business comes through referrals from traditional lenders who must refuse bad credit applicants, but can redirect them to a sub-prime affiliate or partner.
A home buyer looking for a suitable subprime mortgage lending company must therefore shop in the same manner as anyone else. Get in touch with several lenders and shop around for offers. Even if everyone refuses, it's likely that one or more lenders will have an affiliated sub-prime lender willing to take on the risky proposal and approve it with a low down payment.
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