At the beginning of the 1990s, about 5% of all mortgages were subprime mortgages. Today, more than 20% of the mortgage market is made up of loans for people with bad credit. With the rise of subprime mortgage lenders and brokers, it's important to know what to look for when choosing a lender. Not only do you want to make sure you're getting the best deal possible on your subprime mortgage, but you also want to know how to avoid being taken advantage of by a predatory lender.
Why would someone be eligible for a subprime mortgage? The main reason is bad credit, but there are other reasons as well. Changes in income and the type of property being bought can also make it necessary to get an unusual mortgage. If your situation is unique and you need a subprime mortgage, choose your loan agent or broker by doing the following.
Know your credit history and your FICO score in particular. If your score is less than 620, you will likely be offered a subprime mortgage. Don't just assume you have to get a subprime mortgage. Find out what products you can buy. Also, make sure you have easy access to your employment, income, and payment history.
Don't assume that getting the best loan means getting the lowest interest rate. Most subprime mortgage loans will have an interest rate that is two percentage points higher than a regular loan, and there may be extra fees as well. All of the subprime mortgage lenders who want to work with you should send you their loan packages in writing. Take the time to look over each mortgage offer carefully. Not only should you compare the interest rates, but you should also compare the fees.
Be careful about prepayment fees. A subprime mortgage is a way to fix your credit or solve a specific problem for an applicant. It is usually a short-term solution. Hefty prepayment penalties could keep you in a subprime mortgage for longer than you need to be or make it very expensive to switch to a regular mortgage in the future. You may have to pay a penalty if you pay off your loan early, but you can negotiate with each lender to make sure that the penalty is as small as possible.
Even if you want a subprime mortgage lender, you still have a lot of choices. After you've looked at what each lender has to offer, you can negotiate the terms. Do not think that if a lender gives you a subprime mortgage, they are doing you a favour. Most of the time, the money a lender gets from a subprime mortgage is more than what they get from a regular mortgage.
Most people who give out subprime mortgages are honest and take care of their business. Still, there are many different rules about subprime loans, and you should be careful not to get ripped off by a predatory lender.
- Don't let people push you around. Ask for written offers and take your time to compare them.
- Don't sign any papers with blank spaces or dates that are wrong.
- Don't talk to subprime mortgage lenders on the phone or in the mail. Find out things on your own. The Internet, the phone book, and the Better Business Bureau are all good places to start. Ask friends for referrals.
- Don't skip reading any part of your loan documents just because your lender says "that part isn't important."
- Don't let anyone persuade you to lie about your income or your net worth.
It's just like buying anything else to choose a subprime mortgage lender. The better your choice will be, the more you know and the more you research and think about it.
