| Subprime Bad Credit Loan |
| By Credit Federal |
Published
07/26/2007
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Home Loan
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Bad Credit Subprime Loan Options
Since the subprime mortgage market has taken a dive, some bad credit home loan options are no longer available.
Subprime lenders who have not closed their doors, have limited or eliminated subprime loan offers and have left many problem credit home buyers browsing for a loan.
While some of the more questionable bad credit lenders have shut down, more reliable subprime options are resurfacing.
The FHA; for one, wants to make it easier for low and middle income, poor credit people as well as first time home buyers to get loan approval. These loans; although guaranteed by the government, are actually offered by private lenders. Since it's a guaranteed loan, lenders do not face the same high risk and can offer favorable terms.
So why did FHA loans vanish in the first place? It's because they take a bit more work to obtain than other bad credit loan offers.
Good news: The FHA is working towards making their loans more appealing, such as eliminating a 3% down payment requirement, to make it even easier for low income people to qualify. Also, the FHA wants to raise the max loan amount to adjust it to the higher home costs. And interest rates can be lowered for those borrowers with higher credit scores.
People interested in an FHA loan should contact several lenders for comparison shopping, because the lenders offer different FHA loan terms and rates just as they do with conventional mortgage loans.
FHA loans with low interest rates can be approved with low down payments. Adjustable rate mortgages (ARMs), which can help buyers to get through the first, and often most difficult, year of ownership, are also available.
The FHA ARMs reset yearly at no more than 1% higher than the original rate, and can rise no more than 5% above the original rate, keeping them affordable for borrowers.
Another FHA loan advantage is the credit counseling, and the requirement that lenders must help borrowers in trouble instead of simply foreclosing on their homes.
FHA's mortgage programs typically have no maximum income limits for qualifying, so even high income people can get FHA loans. FHA loans; however, mainly benefit low and moderate income borrowers and offer little advantage over prime rate loans. Few high credit score borrowers choose to go through the more complicated process of obtaining them.
Another government guaranteed loan is the VA Veteran's Affairs loan. The borrower has to be a veteran or the surviving spouse of one who died from a service connected condition. Loans are available for up to 100 percent of the purchase price.
Many veterans who don't qualify for a subprime loan may still be able to get a VA loan. VA loans are often made to borrowers with problem credit histories, and rates are highly competitive. A 30 year fixed carries about the same rate as a normal prime rate loan.
The Census Tract; or Community Reinvestment Act (CRA), loan requires banks starting business in a new area to help meet the credit needs of the entire community, including low and moderate income borrowers.
People with a 600 credit score can qualify for these loans, and without having to buy a home in a low income area. Even if a borrower's income is too high to ordinarily qualify, but the house being bought is in the low income census tract, it's still possible to get loan approval.
Other Mortgage News:
Bad credit borrowers are not alone in mortgage payment problems.
Subprime mortgage problems are spreading like a virus to prime loans as even good credit people have started to fall behind on payments.
One of the problem areas for lenders is decreased profits in second lien loans; including home equity loans and home equity lines of credit, due to a surge in delinquencies by even prime borrowers.
These loans were often added onto first mortgages to help finance low or "no down payment" home loans. They were also taken out by prime borrowers to help pay high housing bills or fund their lifestyles. In the past, mortgage delinquencies were tied to personal problems or basic economic reversals, such as a job loss. Today, many delinquencies can be traced to unaffordably high home prices.
Some home buyers, caught up in red hot markets and afraid of getting locked out of homeownership forever, overpaid for houses. As long as prices escalated, they were able to tap the added equity in their properties to cover debts.
But now home prices are falling; off more than 2% from their highs, as lenders are cutting back on 2nd lien loans. When homes go into foreclosure, first lien lenders lay claim to proceeds from a sale. Second lien can get stuck with a total loss.
The increase in delinquencies of prime second liens doesn't mean that prime borrowers overall are defaulting. It's still relatively rare for prime borrowers to default on primary mortgages. But most second lien loans come with adjustable rates and interest rates have been rising. Since a lot of the borrowers were already at the edge of affordability, the increase hurts. Plus they tended to be used more in bubble markets, areas where prices went through the roof and affordability suffered.
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