You finally got a mortgage and it’s subprime. You know you are paying a higher subprime mortgage rate. But is it reasonable? How do you know?
Did you know that not all rates are higher on subprime loans? Subprime doesn’t necessarily mean ‘bad.’ You could have a reason for taking this type of loan outside of having bad credit. The self-employed or retired often use this loan type. They can’t qualify under the Qualified Mortgage Guidelines so they are left with no choice.
Getting a subprime loan doesn’t mean you necessarily pay ridiculous amounts of interest or fees. It all depends on your situation and if you know how to shop around.
What are Reasonable Rates?
First, you must define reasonable rates in your eyes. Are you looking at conventional interest rates? Subprime rates probably won’t compare, but you might come close. It depends on your situation. How risky is your loan? What is the reason you must take a subprime loan?
For example, let’s compare two borrowers:
- Joe has a 700 credit score. He has been self-employed for 3 years. He has a lot of write-offs on his taxes for his business. His income looks much lower on paper than it is in real life. Joe has proof of his income with 12 months of bank statements. John has 20% to put down on the home he purchases.
- Jan has a 620 credit score. She works for an employer for the past 3 years. She has steady income and W-2s. She doesn’t have any assets and only has a 5% down payment for her purchase.
Both Joe and Jan will likely be subprime borrowers. Joe can’t verify his income with his tax returns. His income is too low on paper. This brings his debt ratio up too high to qualify for a conventional or government-backed loan. Joe can get a loan from his local bank, though. They write their own loans and have a program for the self-employed. Joe will likely get a decent interest rate because he has a high credit score and decent income. Joe just can’t prove his income the standard way that the Qualified Mortgage Guidelines require.
Jan can verify her income with her W-2s. She has an acceptable debt ratio, but her credit score is very low. Even though she might qualify for an FHA loan with that credit score, most lenders don’t want to give her a loan because of her low score. If she were to get an FHA loan, she would likely have a much higher interest rate. Jan can also get a loan from her local bank, but it’s a program for borrowers with a low credit score. The risk is higher, but they offer the program for borrowers with W-2 income.
Between the two borrowers, Joe would likely have the lower subprime mortgage rate. He isn’t nearly as risky as Jan. His biggest risk is not being able to qualify his income with his tax returns. He uses an alternative form of income verification, though.
Keeping Your Subprime Mortgage Rate Down
Just like any other loan type, there are ways you can keep your subprime mortgage rate as low as possible:
- Keep your credit score up – Subprime doesn’t have to mean bad credit. A good credit score can be a compensating factor. It can help lenders see that you are a good risk and that you just don’t meet the strict Qualified Mortgage Guidelines.
- Have assets – The more assets you have on hand, the better off your chances of approval and a low interest rate. This is outside of the assets you have for your down payment. You need liquid assets that serve as a ‘back up’ if you can’t make your mortgage payment. The more liquid assets you have, the better your chances of securing a lower rate.
- Have stable employment – Stable employment can help you look less risky. The longer you are at one job, the more predictable your income. It also shows that you are responsible. These factors help lenders look favorably upon your loan application. A borrower that hops from job to job shows irresponsibility and riskiness.
Lenders look at the big picture when determining your subprime mortgage rate. The more positive factors you have, the lower the rate they can provide. Whether or not your subprime rate is reasonable is a personal opinion. However, coming up with as many positive factors as you can will help your rate get as close as possible to conventional rates.