If you have to apply for a subprime home loan do not think that you are a “bad risk” or that you are doomed to pay crazy high-interest rates. After the housing crisis and economy downfall, many people have found themselves in need of alternative financing options. Not as many people qualify for the conforming loan that they once might have been eligible to receive. If the word subprime scares you, read on for a step-by-step guide on how to get through the process stress free.
Determine your Risk
The first step is to really understand your loan profile. Do not call or email lenders before knowing your full situation. Why do you think you need a subprime home loan? Do you have a low credit score? Do you even know what your credit score is right now? Do you not have fully verifiable income? Do you have several late payments that you think will affect your eligibility? Maybe you have a bankruptcy in your past. Whatever the case may be, there are options for you, but you have to know what you are dealing with before you talk mortgages.
When you know what you are presenting to the lender, you will be better informed regarding your options. There are many options out there for those with a low credit score and even those with a bankruptcy in their past. What the lender is going to want to hear is why these things happened. They need to determine beyond a reasonable doubt that you were not simply financially irresponsible. They need to see that you had circumstances that were beyond your control. If you experienced things like:
- Job loss due to a company closing or downsizing
- A change in position and loss of income due to company restructuring
- An illness that left you unable to work
- An injury that made it impossible to work
You have a reason for your economic downturn. You can prove that things that were outside of your control happened. You also need to prove that you picked up the pieces and are trying to get financing once again.
Find your Paperwork
This is probably the most stressful step in the entire subprime home loan application process. You have to gather your paperwork. This means gathering things like:
- Pay stubs covering the last month of your income
- A verification of employment from your employer verifying your dates of employment and your position
- The W-2s from the last 2 years
- Tax returns from the last 2 years if you were self-employed or had any type of job that was not straight salary
- Asset statements for the last 12 months showing your savings/checking accounts
This is the paperwork any lender you apply with will need to see. They need to see verification of the income you claim to make. They also need to see any paperwork that coincides with any negative credit history that reports on your credit report. For example, if you had a credit card that reported several late payments, you will need proof that you brought the account current. You can do this with a current statement showing a zero balance or at least up-to-date payments. You can also secure a letter from the bank itself stating that you are current again.
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Call Around to Different Subprime Home Loan Lenders
Believe it or not, there are many subprime home loan lenders out there today. They are not your big name lenders that you automatically think of when you think of mortgage lenders. They are the local banks and smaller lenders that keep the loans on their own portfolio. Since subprime loans cannot be sold in the secondary market due to the new Qualified Mortgage Guidelines, you have to find lenders that are willing to fund the loans on their own and even service them on their own. There are many more lenders willing to do this today than there were a few years ago.
When you call these lenders, make sure you are open and honest about your situation. There is no sense in hiding things that happened as everything is a matter of public record. Hiding the fact that you have a blemished credit history will only set you up for disappointment down the road as the lender will not be able to provide you with the loan program he suggested when you were spinning your story. When you tell a lender what you went through and the steps you took to rectify the situation, they can be more honest with you regarding what programs are available.
Choose a Few Lenders and Apply
Once you narrow your choices down to 2 or 3 lenders, it is time to start applying. In order to make it official, you need to fill out a mortgage application. On this application, you will detail your personal identifying information as well as your financial information. This is where you will put things down that need to be proven. When the lender receives your application, they will run your credit and then will provide you with a rate/program quote. You can then compare the quotes to decide which one is right for you.
Choosing the Right Lender
Once you compare the programs available to you, it is time to choose one lender and move forward with the loan process. This is when the underwriter will ask for the documentation you gathered earlier. He might also ask for further clarification on items. The faster you respond, the quicker the loan process will go for you. Once the underwriting process is complete, you will be able to close on the home, assuming everything checks out as it should.
Applying for a subprime home loan does not have to be as scary as it sounds. Subprime is not even a word that many lenders use today – instead, they use alternative financing. These are the loans that might have slightly higher interest rates or unique terms. They cannot, however, charge excessive fees or insanely high-interest rates. Everything is pretty regulated by the government today, ensuring that every borrower is protected, while ensuring that the lenders are protected as well. In the end, everyone wins because those that can afford the financing are provided it and those that cannot are given another chance when they tidy up their finances.