Recently, a rising number of lenders and mortgage brokers have started offering home mortgage loans to borrowers with bad credit, collectively known as ‘sub-prime borrowers’. In sub-prime mortgage lending, lenders grant mortgage loans to borrowers with less-than-perfect credit who may have been turned down by conventional lenders. The increasing offerings are driven by the profitability of the subprime industry, wherein people with poor credit records are charged higher interest rates for their mortgage loans.
While some subprime lenders operate independently, more and more mainstream lenders are running subprime mortgage lenders under various names. Although subprime lenders do not label themselves per se, the fact that they offer consistently higher rates than typical lenders is proof that they cater to people with less-than-stellar credit.
Subprime lenders do not automatically turn a mortgage loan application away just because of flaws in the customer’s credit history. They offer flexibility in the prerequisites that would-be borrowers need to meet. Some of the most common difficulties that hinder people from qualifying for a credit approval are less-than-perfect credit, having incomes that are hard to substantiate (i.e. work from home), having too much existing debt or loans, and bankruptcy or foreclosure.
For incomes that are hard to verify, subprime lenders offer home loans that do not require documentation for traditional income. Consumers with too much existing debt are offered flexible lending standards. For those with bad or less-than-perfect credit, there are loan programs that can compensate for the credit blemish. Usually, subprime lenders work out a plan that entails loans with terms and rates that cater to the need of the subprime borrower. And, even though a potential borrower had been in bankruptcy or had a foreclosure, he can still qualify for certain loan programs, on the condition that these issues get resolved before he signs the loan documents.
Subprime lenders work by offering home mortgage loans with rates and fees that are based on the same factors that mainstream lenders use. Higher rates, for instance, are applicable to consumers with lower credit score and loans with a small downpayment. With subprime lenders, the need to compensate for the bigger risk and the higher costs of subprime lending requires them to charge more for the overall loan structure. Also, mortgage loans tailored for people with bad credit have higher chances of going into default. Meanwhile, borrowers who don’t go into default have a greater tendency to prepay their loans early. Most subprime loans often have mandatory prepayment penalty clauses that penalize borrowers who prepay early.
While home mortgage loans for people with less-than-perfect credit are generally plentiful, consumers would do well to shop around for the best subprime lender who can offer reasonable rates and terms, plus the option of refinancing in the future once their credit score gets better.
