CHALLENGED CREDIT LOANS

It is an unfortunate fact of life that death, divorce, unexpected medical issues and plain bad luck, happen. Many Good People have Poor Credit. This no longer means that you cannot buy a home or refinance your existing one.

Loans for people with credit problems are commonly referred to in the lending industry as Subprime Loans. In the past these loans were very hard to get and rather expensive. All that has changed in the past few years. The Subprime loan market is now one of the fastest growing segments of mortgage lending with an increasing number of lenders doing nothing but Subprime loans.

Generally, subprime mortgages are for borrowers with credit scores under 620. Credit scores range from about 300 to about 900, with most consumers landing in the 600s and 700s. Someone who is habitually late in paying bills, and especially someone who falls behind on debts by 30, 60, 90 days or more, will suffer from a plummeting credit score. If it falls below 620, that consumer is in subprime territory. Few lenders will use the term "subprime" to describe you or your loan, because it's considered bad salesmanship. You might hear the word "non-prime" or, more likely, an adjective won't be used to describe the mortgage at all.

Mortgages for people with excellent credit are somewhat of a commodity. Rates don't vary much from lender to lender for loans of this high caliber. That's not the case with subprime mortgages. You might receive widely differing offers from different subprime lenders because they have different ways of weighing the risk of giving you a loan. For that reason, it's important to comparison-shop when your credit score is less than 620. This is one of the real benefits of working with a mortgage broker. Unlike a bank, a mortgage broker has the ability to place loans with a variety of banks and lenders. A mortgage specialist "shops" for the best loans on a daily basis. A mortgage specialist is not restricted by one lender's guidelines. I am a mortgage specialist.

How subprime mortgages differ from prime loans.

Subprime loans have higher rates than equivalent prime loans. Lenders consider many factors in a process called "risk-based pricing" when they come up with mortgage rates and terms. This makes it impossible to generalize about subprime rates. They are higher, but how much higher depends on factors such as credit score, size of down payment, and what types of delinquencies the borrower has in the recent past (from a mortgage lender's standpoint, late mortgage or rent payments are worse than late credit card payments).

A subprime loan also is more likely to have a prepayment penalty, a balloon payment, or both. A prepayment penalty is a fee assessed against the borrower for paying off the loan early -- either because the borrower sells the house or refinances the high-rate loan. Some programs allow you to sell the home without penalty but charge a penalty for an early refinance. A mortgage with a balloon payment requires the borrower to pay off the entire outstanding amount in a lump sum after a certain period has passed, often five years. If the borrower can't pay the entire amount when the balloon payment is due, he/she has to refinance the loan or sell the house.

Subprime lending has become a very specialized part of mortgage lending. It requires empathy and tenacity to become a superior subprime mortgage broker. At Cascade Home Equity, we understand that life happens to good people.