Subprime Lending Coming Back
Customers with bad credit reports were shut out of the mortgage market after the real estate bubble burst, but now a handful of small lenders are starting to offer sub prime home loans once again.
The once toxic adjustable-rate mortgages or “ARMs” that led to the foreclosure of many homes during the housing bust are being offered to borrowers who have credit scores below 640.
These loans come with high interest rates from 8% to 10% and require down payments from 25%-35%. Long gone are loans with little or no down payments and low introductory interest rates.
Bill Dallas from Skyline Financial in Calabasas California says that some borrowers who are trying to rebuild their credit are more than comfortable with this and view it as their best chance of improving their credit profiles and get a home loan at the same time.
Most of the applicants for these types of loans are young, first-time homebuyers and former homeowners who have had foreclosures in their credit history.
They are customers who want to buy a home but cant says Dallas a Residential Mortgage Loan Originator at First Franklin, who was a subprime lender that closed during the mortgage meltdown.
Since Fannie Mae and Freddie Mac wont back these loans, these borrowers have nowhere else to turn to.
The Federal Housing Administration does continue to support low credit score borrowers, but they have hiked their fees and premiums.
The Consumer Financial Protection Bureau protects borrowers by not allowing lenders to implement prepayment penalties nor carry interest rates that increase after default. Borrowers must also be provided with homeownership counseling from counselors approved by the U.S. Department of Housing and Urban Development.
Wells Fargo and some small lenders have recently lowered the minimum credit score it requires of borrowers to get FHA loans.
FHA spokesman Tom Goyda says applicants with credit scores from 600 to 640 fall within FHA guidelines and Wells Fargo is now approving these types of borrowers.
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Source(s):
1. Subprime mortgages making a comeback, Les Christie, March 21, 2014, CNNMoney, http://money.cnn.com/2014/03/21/real_estate/subprime-mortgages/index.html, Retrieved 4/15/2014.
