Subprime mortgage lending was one of those archaic terms that nobody knew or cared about, until the 2007-08 real estate crash where it was fingered as the root cause of a meltdown on Wall Street. That led to the credit crunch crisis and the Great Recession that swept across the world and destroyed trillions of dollars in hard earned wealth. The concept is now universally infamous, but the truth is that not many people really know much about it.
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 bubble popped and the foreclosures started piling up, these packaged securities essentially became worthless. It brought down lenders and investors who had sunk billions into unworthy borrowers and MBS investments. The result was a massive credit crunch in the banking sector as lending dried up.
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.
However, the sub-prime home loan is still a feasible solution available to certain customers. For example, many people who lost their homes to foreclosure or walked away from defaults are now looking to buy again, but are hindered by their past record. Similarly, many others saw their credit ratings downgraded due to recession-induced loss of employment, but are now gainfully employed again and looking to buy a new home.
The actual process of applying for a sub-prime loan is rather tricky. Anyone with a credit score of 600 or below will likely be ineligible for a convention home loan, but sub-prime lenders do not make themselves available publicly as before. They get most of their clientele through traditional lenders who refuse applicants with a bad credit history and refer them to a known sub-prime lending partner or affiliate.
Home buyers with a shaky credit history must shop like every other buyer. Contact lenders, ask for quotations and find out whether a home loan proposal can be approved. Even if the lender says no, they can surely direct applicants to an affiliate or partner company that is a subprime mortgage lending specialist and will have no problems approving a risky loan with a lower 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 bubble popped and the foreclosures started piling up, these packaged securities essentially became worthless. It brought down lenders and investors who had sunk billions into unworthy borrowers and MBS investments. The result was a massive credit crunch in the banking sector as lending dried up.
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.
However, the sub-prime home loan is still a feasible solution available to certain customers. For example, many people who lost their homes to foreclosure or walked away from defaults are now looking to buy again, but are hindered by their past record. Similarly, many others saw their credit ratings downgraded due to recession-induced loss of employment, but are now gainfully employed again and looking to buy a new home.
The actual process of applying for a sub-prime loan is rather tricky. Anyone with a credit score of 600 or below will likely be ineligible for a convention home loan, but sub-prime lenders do not make themselves available publicly as before. They get most of their clientele through traditional lenders who refuse applicants with a bad credit history and refer them to a known sub-prime lending partner or affiliate.
Home buyers with a shaky credit history must shop like every other buyer. Contact lenders, ask for quotations and find out whether a home loan proposal can be approved. Even if the lender says no, they can surely direct applicants to an affiliate or partner company that is a subprime mortgage lending specialist and will have no problems approving a risky loan with a lower down payment.
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