Find the Mortgage That’s Right for You
The key to finding the right subprime mortgage is to research, shop and compare. Subprime mortgages come in a variety of forms but they can be classified based on their interest rate.
These are the most common type of subprime mortgages. Some subprime ARMs have a fixed interest rate for a certain period then adjust periodically. Other subprime ARMs give borrowers the option to choose how to repay the loan.
The interest rate on fixed-rate mortgages remains constant throughout the loan’s life. While the usual FRMs are available in 15- and 30-year terms, subprime FRMs have loan repayment schedules that extend to 40 or 50 years.
Mortgage Loans – FAQs
What is a subprime mortgage?
A subprime mortgage is a loan product given to consumers who have (i) poor or bad credit history, (ii) low credit score, (iii) filed for bankruptcy, and/or (iv) been denied of traditional home purchase loans. To their credit, subprime mortgages got their name from the type of borrowers they cater to and not the interest rate (see Questions 4 and 5).
What credit score is considered a subprime score?
If you have a credit score of below 600, 620, or 640 as it varies, you could qualify for a subprime mortgage.
How do I apply for a subprime mortgage?
- Contact lenders and ask if they offer subprime loans at what cost.
- Prepare your financial statements as proofs of employment, income, and assets. These papers include pay stubs, tax returns, deposit statements, bank statements for all accounts, monthly expenses, as well as billing statements on utility costs, mortgage/rent payments, and credit cards.
- Send these documents over to your lender and allow it to run a credit inquiry to determine your credit score.
- Complete a loan application form.
What are subprime mortgage rates?
These are rates imposed on subprime mortgage loans, they are higher than prime rates because of what lenders deem as a higher lending risk.
What determines subprime mortgage rates?
Lenders usually consider these four factors when determining the interest rate on your mortgage:
- Credit score
- Down payment size
- Late payment delinquencies (found on credit score)
- Delinquencies types
Do I have to pay higher down payments on subprime loans?
It depends on the lenders and the loan program. There are banks that offer subprime loans with down payments as low as 3%. Still, there are others that require no less than 20% down payment.
What types of subprime mortgages are available in today’s market?
Today’s subprime mortgages include:
- ARMs. Adjustable-rate mortgages remain one of the most popular types of subprime mortgages. In the case of 2/28 and 3/27 ARMs, they offer an initial fixed interest that will adjust after the fixed-rate period ends.
- Interest-only ARMs. Although a subset of ARMs, interest-only (I-O) loans allow borrowers to pay only the interest portion of the loan for a certain period.
- FRMs. Fixed-rate mortgages have an interest rate that remains the same throughout the loan. The repayment schedule can be 40 to 50 years.
- Dignity mortgages. A recent addition to the subprime family: down payments can be as high as 10% and rates higher for a certain period.
I’ve heard of stated income loans. Are they subprime loans?
Stated income loans belong to a unique classification of loans called Alt-A or Alternative-A paper loans. Alt-A loans are in between the prime and subprime categories; the borrower’s credit is decent but the mortgage itself has issues like high LTV ratio and inadequate income documentation.
Examples of Alt-A loans are stated income/stated asset (SISA) mortgages, no income/no asset (NINA) loans, and low/no documentation loans. Under SISA loans, lenders don’t verify the income and assets being stated on a borrower’s loan form and only verify the source of income. Low- or no-documentation mortgages demand that borrowers provide limited to no documents in support of their income, assets or employment.
Can I refinance my subprime mortgage?
Yes, you can refinance to get a lower rate but it might take longer than usual in the case of subprime loans. To prepare yourself for refinancing, here are a few steps in brief:
- Determine how much you owe on your current loan.
- Find out if your loan has a prepayment penalty and its expiration date.
- Review your credit score and report any errors that could lower your FICO score.
- Build a savings history and at least a two years’ worth of employment history.
- Obtain an appraisal from a licensed appraiser.
What is a prepayment penalty on mortgages?
A prepayment penalty is triggered when a borrower pays off the loan before the period allowed by the lender. There are two instances when a loan is effectively paid off: when a house is sold or when an existing mortgage is refinanced. This penalty is based on a percentage of the current loan balance or a few months’ worth of interest.
There are two types of prepayment penalties. Under soft prepayment penalty, you can sell the home at no penalty charge but if you refinance, you will incur the penalty. With hard prepayment penalty, whether you sell the home or refinance, you will be charged with a penalty.