Many lenders shy away from the idea of subprime loans. And they have a reason to. Subprime mortgages are the root of the 2008 financial crisis that many people today are still recovering from. But are subprime loans really all evil?
In a nutshell, subprime loans are loans granted to borrowers with credit scores below what is considered prime. That refers to scores 600 or below. Now these borrowers are considered high risk, that is why conventional lenders said no to them in the first place.
To make up for such huge risks, subprime lenders still lend money to these borrowers in exchange for higher interest rates.
Today, there are both adjustable and fixed-rate subprime mortgages available in the market. The variety and diversity may be an advantage to a desperate borrower but could also easily invite them into a trap. It is important to exercise caution before you sign any contract; the urgency is never an excuse to not get thorough with who you do business with.
What are its disadvantages?
- High closing fees. Expect your lender to charge expensive fees on origination and underwriting.
- Strict income requirements. You must be able to establish that you have a reliable income source that you can use to cover for the mortgage payments.
What are its benefits?
- Conventional lenders require a certain timeline of good credit record to qualify for a conventional mortgage. When the borrower recovers his or her finances sooner and want to take a mortgage, the report will not help him or her. A subprime mortgage lets the owner with bad credit still own a home despite the tarnish in his or her record.
- Borrowers can actually use the subprime loan for credit building. If you are confident that you can carry the burden of the loan, then go ahead and take the opportunity.
It takes some serious self-evaluation to decide to take the risk of subprime mortgages. For most, it’s a big no no. But situations vary and if you are among the few with very specific financial requirements, a subprime mortgage could be just what you need.