The biggest question whenever someone wants to purchase a home usually has something to do with the down payment. Right after the housing crisis it seemed like every program required 20 percent down, which we all know is highly unlikely for many people. Today, however, the tides have turned as there are many programs available, including subprime programs. Unlike FHA loans, however, there is not a designated down payment for subprime loans.
The Definition of Subprime Loans
When you think of subprime loans are you thinking of shady lenders that give out No Income, No Asset Loans or No Document Loans? Those are the subprime loans of the past. Today, subprime equals Non-Qualified loans. This means that the lender is not protected against any type of lawsuit if the borrower were to default on the loan. Loans that meet the strict Qualified Mortgage Guidelines are protected against a lawsuit, but they are not subprime loans.
A Non-Qualified Mortgage does not mean a bad mortgage, nor does it mean that you will not have to verify anything. It means that the lender offering the program is willing to keep the loans in this program on its own books. The loan will not be sold in the secondary market because, in order to do so, it must follow the QM guidelines. Non-QM loans might have a few different requirements or flexible requirements that make it easier for you to qualify, though.
Who Needs a Subprime Loan?
It might seem risky to even talk about subprime loans, so who needs them in the first place? Basically, anyone that does not meet the QM guidelines needs this type of loan. This includes those that cannot fully verify their income; those that have less than stellar credit; and people with high debt ratios. Anything that makes the loan “risky” would make it a non-QM loan, which would mean subprime. For example, a person could have a 750 credit score (which is good), but be self-employed with only a 12-month history and have a 44 percent back-end debt ratio; this would be an example of someone that would need a subprime loan because he does not have a full 24-months of self-employed income and his debt ratio exceeds the QM guidelines of a 41 percent back-end debt ratio.
The Required Down Payment for Subprime Loans
Because different lenders offer different programs, the amount of the down payment varies. One thing you can definitely expect is that a down payment will be required. The amount of the down payment for subprime loans, however, will depend on the lender. In general, no less than 5% is usually allowed for a down payment as then the loan becomes even riskier for the lender.
Every lender will have different programs, however. When you shop around, ask about the differences in the down payment requirements. For example, you might find a program that allows just a 5% down payment but requires that you take a much higher interest rate in order to make up for the risk that is involved. That same lender might also provide a program that requires a 10% down payment and that offers a lower interest rate because you have more invested in the home, so you are less likely to default on your payments.
Subprime loans are not a term that is thrown around all that often any longer; many people call them non-QM loans simply because they do not meet the Qualified Mortgage Guidelines. At first, after the housing crisis, no one wanted to offer any type of subprime loan because they were being blamed for the mortgage crisis in the first place. But as things have moved along, more and more lenders are venturing into the subprime industry because there is such a need in that industry.
People have moved on, but they have had to do so in creative ways. Many more people are self-employed and many borrowers have mediocre credit and high debt ratios. It is the way of the world right now and without subprime loan options, many more people would be left without adequate housing. Because there is a not a written in stone type required down payment for subprime loans, you can shop around and find the program that is just right for you, making you the homeowner you always wanted to be.