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Subprime Mortgage Loan

This article was written before 2007 where lenders saw the virtual collapse of the sub-prime market. I will be updating this section in the near future. Aubrey

Are there loan programs available for borrowers with less than perfect to extremely poor credit?  Absolutely.  Fundamentally, all the lender wants to be assured of is that 1) one has the ability, and 2) the desire to repay the debt.  The worse one's credit, the more evidence of one and two one will need to muster.

If you think you may be "credit challenged", one of the first things you'll want to know is, just how "less than perfect" is your credit?  Fortunately, many bright people have dedicated their professional lives to creating methods for answering such questions. 

Statistical models which balance numerous credit factors provide methods for determining credit ratings.  The models generate a single number-a credit, or FICO score-which provides lenders with a starting point for making decisions about lending money.

How do you get your credit score?  Fortunately there is now a law requiring that consumers be given their credit report.  Lenders are also now required to give you your credit score. The lender should also tell you what factors contributed to your credit score if your score was a factor in delaying or denying your loan application. Credit bureaus don't include credit scores on consumer credit reports, they only show what is reported. To get a free copy of your credit report visit www.annualcreditreport.com. To get a free copy of your credit score visit privacy matters.

Assuming you know your credit score-what does it mean?  Credit scores fall between approximately 375 to 900.  Anything over 670 is considered good credit.  Borrowers with good credit are able to get the best financing rates and terms available to the general public.

Lenders classify borrowers into the following credit categories based upon their credit scores. These categories can vary slightly among lenders. For example, a credit score of 620 could be a "B" with one lender, but a "C" with a different lender. The lower your score, the more expensive and restrictive your potential financing choices.

It would be confusing at best to present general underwriting guidelines in an attempt to interpret credit ratings and scores as they relate to individual borrowers. In A- through E credit scenarios, dozens of factors are considered in the decision-making process. Your best assurance of getting the best possible loan is to shop among several lenders.

How to Save Money on Sub-Prime Mortgages

Sub-prime mortgages don’t mean you have to pay excessively high interest rates to buy a home. By taking time to do some research and pick the right terms, you can save thousands on your mortgage. The following five tips will help you get low rates with the right subprime lender.

Compare Lenders

The number one way to lower your interest rates on your sub-prime mortgage is to compare lenders before you apply. It sounds so simple, but too many homebuyers skip this step, costing them thousands.

Plan on taking at least a day to explore your options. The easiest way to look at financing packages is to request quotes online. While you are requesting quotes, take a look at conventional lenders as well. They often offer good rates and terms for those with adverse credit histories.

Pick An ARM

Adjustable rate mortgages (ARM) offer lower rates and are easier to qualify for than fixed rate mortgages. The drawback is that ARM rates can increase over the years. But if you are planning to move soon or just want to buy a home, then an ARM probably is your best choice.

You can also convert your ARM when your credit score improves. As property prices increase and your equity builds, you will also be able to get better terms in the future.

Increase Your Down Payment

By increasing your down payment, you can knock off up to a percentage point. Zero or little down financing is great for those short on cash, but rates are significantly higher. Ideally, you want to put down 25% to get the best rates. Just leave enough cash reserves to financing moving expenses.

Pay A Point Or Two

Points paid upfront can also lower your interest rate. You want to be sure though that you recoup the upfront costs. If you plan to move or refinance in a couple of years, you will not see the savings of lower rates.

You may also find that your money would be better spent on increasing your down payment than on paying points. With this type of decision, you will want to do some math with a mortgage calculator.

Bulk Up Cash Reserves

By increasing your cash reserves, you can also improve your credit score to qualify you for lower rates. Take advantage of tax refunds or cash bonuses by putting them into your savings. Lenders look at saving accounts, money markets, and CDs as cash reserves, not stocks or other volatile assets.