Monday, June 2, 2014 - Article by: Justin Fitzhugh - Nations Lending Corporation -
When you have a tarnished credit history, or when your source of income does not fit the traditional mold, you may be able to finance the purchase of your home through a subprime mortgage.
Most lenders have high standards for borrowers and require good credit and verifiable sources of income. But the fact is that more and more borrowers have unique situations, and there is a higher demand for non-traditional mortgages. Subprime lending developed in response to growing credit demand from less than perfect borrowers, and today, those who carry a history of late payments, foreclosures, bankruptcy, tax liens, collections, etc. are able to find a lender willing to fund their mortgage needs.
Subprime mortgages are more expensive than prime mortgages. In other words, borrowers who have a low credit score and/or have an unusual source of income, will pay higher interest rates and possibly higher transaction fees. This is because these borrowers are more likely to default than borrowers with a good credit scores and/or a good sources of income.
Borrowers with a good credit score who have reliable and continued sources of income are labeled prime because their mortgage will be sold to investors as A paper, often referred to as prime paper. Borrowers with less than average credit scores, or those who have unreliable, iffy, sources of income are labeled subprime borrowers because their mortgage will be sold to investors as B/C paper, often referred to as subprime paper. In investor parlance, prime borrowers represent little risk of defaulting in their mortgage, while subprime borrowers represent a higher risk of default.
Subprime loans provide money for people who otherwise cannot afford to buy a home, and this type of loan is meant to be temporary, 12 - 36 months. During this time, a borrower with a tarnished credit history has the opportunity to show he/she can be a good risk. During this time, if the borrower makes timely payments and avoids delayed payments in all other financial obligations (credit cards, car loans, etc) his/her credit score will improve.
Unfortunately, sometimes a lender or loan officer may sell an expensive mortgage to a borrower who cannot afford it, and after a while, the borrower may be unable to keep up with his/her mortgage payments. The most common scenario is when the effective interest rate on the mortgage adjusts upwards, and the monthly payment increases. This was the most common scenario as the subprime lending crisis unfolded. To ensure borrowers are lent money only when they can repay, the government enacted many rules that require lenders, underwriters, and loan officers to verify an applicants ability to repay. Although subprime loans have exhibited the highest incidence of predatory lending, not all subprime loans are predatory, and as I mentioned before, many people have successfully used this type of loans to finance the purchase of their home.
Whenever you are applying for a non-conforming loan (i.e. conforming loans are the vanilla type of loan), the key is to make an informed decision. Make sure you understand the terms of your loan, and be prepared for any possible increase in payments if yours is an adjustable rate mortgage.
The law that requires us to ensure a borrower can repay a loan is called the ability to repay rule, and here read more details about it: http://files.consumerfinance.gov/f/201401_cfpb_mortgages_consumer-summary-new-mortgage.pdf#page=3
Nations Lending Corporation differentiates itself through its common sense underwriting. We make it our mission to carefully look at every loan application. Our mortgage branch opportunities feature average 28-day closings with minimum overlays. We are not a net branch company, but we are a far better alternative than any mortgage net branch opportunity out there. Visit our website to learn more.
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