The comeback of subprime lending might have you worried. Isn’t that what started the problem in the first place? Are we going to head towards another housing crisis in the near future? It is easy to think this way, but it is safe to say that lenders and investors are much smarter about the non-conventional loans they offer now. While you might find more offerings now – you can guarantee that they will require many more qualifications than they did before.
Why we Need Subprime Lending
Today, we need subprime lending more than ever before. With the institution of the Qualified Mortgage Guidelines, many people that might have been able to go the conventional route suddenly are unable to do so. Whether their debt ratio is too high; credit scores too low; or their employment not fully verifiable, they cannot get a Qualified Mortgage. Without the market for subprime borrowers, many more people would be without homes than there are already.
We need this type of lending for the people that have had to change jobs recently due to no wrongdoing of their own. We also need it for the people that have had to start their own businesses and cannot fully verify their income just yet. The people that have more bills than the QM debt ratios will allow also need it. This lending is for the people that are good borrowers, yet are deemed “bad” borrowers by the QM guidelines.
What Subprime Lending is Not
What you can rest assured about is that subprime lending is not the lending it used to be. You will not find a program where you do not have to verify anything. You will have to verify a lot, in fact. You will always need an appraisal and you will always need to verify your income. What might differ is how you verify your income, for example. Let’s say you are self-employed and you have not filed a proper tax return yet or your tax return shows such little income that no one would ever approve you for a mortgage, yet you make a good income. You might find a subprime lender that will take your bank statements as proof of income rather than your tax returns. This is just one example of what a subprime lender could do for you.
The subprime lenders are not out to give just anyone a loan. In fact, they are prohibited from doing this with the Ability to Repay Rules. Every lender has to follow these rules; they are not just for conforming lenders. What this rule basically says is that the lender did its due diligence to determine that you could afford the loan that they give you. This means that they verified your income and calculated your debt ratio, even if it was in a different manner than the conforming lender would verify it.
Good News for the Economy
What subprime lending means for the economy is more houses being purchased. That’s good news, right? With fewer houses sitting vacant, values will keep going up and the housing market will make a full comeback. We are not there yet, but hopefully, with the resurgence of secondary lending, more and more people will be able to get qualified for a home loan.
If you live in an area where values have remained stagnant after the housing crisis, they should start to come up. With more houses on the market and more houses actually selling, the values will eventually creep up. With more and more options for the borrowers wishing to purchase those homes, you will start to see things improve over time.
The changes might not be instant, but they will be for the people that need some type of subprime lending, for whatever reason. These people will suddenly be able to become homeowners even if they have been told no time and time again.
If you have “iffy” circumstances that would not allow you to qualify for conforming lending, consider shopping around with different lenders. The lenders that keep the loans on their books are the ones that will offer alternative financing. Shop with several different lenders to see what is available out there and then compare your choices to find the one that is right for you.