There are many different loans and mortgage products that were made popular in the late 1990’s and early 2000’s. One type of home loan that received a lot of media attention is the subprime mortgage. But what are subprime loans? Have you seen The Big Short? Do you know what the Dodd-Frank Act is? Discover what used to be the subprime mortgage loan industry.
PLEASE NOTE, WE DO NOT OFFER SUBPRIME LOANS.
What are subprime loans?
A subprime mortgage is one that is typically issued to a borrower who has a poor credit rating. Conventional prime mortgages are not generally offered to borrowers that have low credit ratings because the lending company considers the borrower as being at too great of a risk in terms of defaulting on the mortgage payments.
Lending companies will tend to charge interest on subprime mortgage at a considerably higher rate when compared with traditional prime mortgages. They do this to compensate for the greater risk. These mortgages tend to be adjustable-rate loans as well arm-rates, which means that the interest rate could possibly increase at specific points in time; they were generally based on LIBOR, also known as the London Interbank Offer Rate. The Dodd Frank Act provided new and more stable regulations surrounding that of mortgages, with the hopes of preventing a future financial crisis meltdown.
Characteristics of subprime loan borrowers
Some of the most common characteristics of subprime loan borrowers are as follows:
- High cost loans
- Poor loan terms
- 2/1 or 3/1 arm
- High risk of default
- Had a foreclosure within the past two years
- Has been bankrupt once in the past five years
- Loan payments or credit card payments have been delayed
- Poor credit history
- A high debt-to-income ratio that is equal to or exceeds
- A poor credit score
- High debt-to- income ratios
- No income, no assets
- Interest only features
- Or unique situation that traditional lenders wouldn’t be a fit for
What are the different types of subprime home loans?
There are a number of different types of subprime loans, so let’s take a look at some of the most common below:
Fixed-rate subprime loan - With this type of subprime loan, the interest rate will stay the same for the full duration of the loan. Nevertheless, the duration of the loan tends to be longer than the average home loan. For example, it could be 50 years rather than 30 years.
Interest-only subprime loan - This type of loan is structured in a way that borrowers will only pay the interest part of the loan throughout the early days of the agreement. This means that the mortgage payments can be more affordable, to begin with. Nevertheless, when payments increase at a later date, the difference can be quite steep, so you would need to prepare for this.
Dignity subprime loan - With this type of subprime mortgage , the borrower would be required to put down a downpayment and while accepting a higher rate of interest for the beginning period of the term. Should the borrower meet these requirements, the interest rate will reduce over time until it reaches a prime rate.
Adjustable-rate subprime loan -The interest rate is going to remain the same for the starting period of the loan. However, it will change to a variable rate at a later date.
Getting a subprime loan
In most cases, a low credit score was considered applicable to subprime borrowers. However, it is important to note that this is not always the case. It does differ from lender to lender, as all mortgage providers have their own requirements. Just because you may have a low credit score does not mean you have options, you may qualify for superior mortgage programs as subprime loans are no longer offered and are outdated. Subprime loans also were labeled as a big piece of the financial crisis of 2008.
By using a credit score, applicants can be segmented into different categories. Nevertheless, it is up to the lender to determine whether or not an applicant is a good fit, just as they would with a conventional mortgage. Checking your credit score is a good place to start, though, when determining whether or not this is the right solution for you.
The Former Lenders - What are Subprime Loans
To get a better understanding of what subprime mortgages are and how they work, you must also understand what escalated the crisis and why they were offered in the first place. Whether or not a subprime loan is right for you depends on your individual circumstances. It may make more sense to try and build your credit rating and apply for a mortgage once improved. This is something an experienced mortgage broker may be able to help you with or provide proper guidance. MortgageQuote.com does not offer subprime mortgages, as these loans are now of the past. Several of the past subprime domain names are now defunct, or have merged into other companies.
New Century Financial Corporation at one point was the largest subprime lender in the nation and went bankrupt in 2007, after becoming the first of the largest subprime lenders to fall. If you ever saw the movie, The Big Short, you may have recognized this name.
American Home Mortgage Investment Corporation, which was one of the top 10 largest subprime lenders. In 2007, the company went defunct.
Fremont General Corporation was another top-10-subprime lender that went defunct in 2010 after filing for bankruptcy on June 18, 2008.
BNC Mortgage Inc. was a top-3-subprime lender at one point after being purchased in the year 2000 by the Lehman Brothers.
EMC Mortgage Corporation was a top-20-subprime lender and was owned by Bear Stearns and to our understanding stopped making loans ‘out of the office’ in December 2007 and apparently now closed.
WMC Mortgage Corporation was previously owned by GE Capital when they were purchased in 2004,reaching to becoming a top-5-subprime lender.