What Is A Subprime Mortgage Loan? A Complete Guide

What Is A Subprime Mortgage Loan? A Complete Guide

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November 22, 2022

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If you’re tired of renting and constantly second-guessing if you qualify for a home loan, don’t be discouraged. You still have options. Getting a subprime loan can make it possible for you to become a homeowner.

Many Floridians like yourself believe blemished credit issues will prevent home ownership.  However, acquiring your piece of real estate in Tampa Bay or other surrounding parts of the sunshine state is possible. Subprime loan terms will require a higher down payment and a mortgage loan with higher interest rates, but you won’t require a perfect credit score of 700 or more.

Today’s Subprime Loans

The subprime loan application process is not like in 2007 or 2008. Unlike during the Great Recession, subprime mortgages were largely unregulated and led to widespread foreclosures.

Today’s subprime mortgages are regulated and can be a great  option for borrowers struggling with credit challenges.  With the help of the U.S. Department of Housing and Urban Development, you can really weigh your options. Borrowers participate in counseling approved by the U.S. Department of Housing and Urban Development (HUD) before being approved for a loan.

While it may take some extra time to participate in counseling, it is important to remember that this change is meant to help you understand the risks of taking out a subprime loan and to ensure that you are prepared to make your payments on time.

Interested in learning more about subprime loans? If you’re a Sunshine State resident with challenged or bad credit and are motivated to become a homeowner, read on.

How Do Subprime Mortgages Work?

Subprime mortgages are also known as non-prime mortgages. After a careful review of your credit report, a lender may offer a subprime mortgage if you have the following:

  • Credit score less than 660
  • A bankruptcy discharged after two years
  • Recent credit history of late or missed payments
  • A debt-to-income ratio of 50% or more

A subprime loan is also considered a bad credit home loan option for borrowers who don’t qualify for traditional home loans. Lender qualifications for a subprime loan may vary.

Dodd-Frank Act

With the Dodd-Frank Act of 2010, keeping your dream home becomes more important by being able to afford it. To avoid a repeat of the mid-2000s financial crisis, preventing foreclosures and fair lending is the goal.

The Dodd-Frank Act was passed in 2010 in the wake of the housing market crash. One of its key provisions is the ability-to-repay (ATR) rule, which requires lenders to evaluate a borrower’s ability to repay a loan before extending credit.

This rule effectively ended the practice of no-doc mortgage loans and other practices that led to the subprime mortgage crisis in the early to mid-2000s.

With the help of quality lenders, regulations by the U.S. Department of Housing and Urban Development, and the Dodd-Frank Act, applying for subprime loans in Tampa is a viable and safe option.

Subprime Loan Types

With the help of various lenders from financial institutions, we often hear about conventional mortgages. But like conventional mortgages, there are various subprime mortgages to choose from.

The following subprime loan options may assist you on your real estate journey of homeownership:

Interest-only Subprime Loan

Making interest payments only helps you as the borrower to delay larger payments for a set period of time. The time period to pay interest only varies. Due to deterring principal payments, you don’t build home equity over time from payments. For example, a loan like this makes sense for properties located in high growth areas where you’ll still accrue equity as home prices go up.

Fixed-rate Subprime Loan

There are fixed-rate subprime loans available, just like conventional, Federal Housing Administration (FHA), and other fixed-rate mortgage loans. Without any surprises, you’ll pay the same monthly payment.

However, unlike conventional loans and FHA, a subprime loan may offer you a 40 to a 50-year mortgage. Although this allows you possibly a lower payment, keep in mind that you will pay more interest over the life of the loan. You may consider a refinance later on as your credit score improves in order to get a better interest rate.

Adjustable Rate Subprime Loan

In an adjustable-rate mortgage (ARM), the interest rate can be adjusted based on the market index or Federal Reserve fund rate. Choosing this option has the advantage of building home equity as you pay the introductory interest and principal.

With a 5/1 ARM, for example, you pay your mortgage payment on a low fixed rate for 5 years, then once the adjustable rate mortgage expires, your monthly payment will adjust once or more a year over the life of the loan.

Dignity Subprime Loan

Mortgage lenders offer homebuyers an incentive to go from a subprime loan rate to a prime rate with the help of a dignity mortgage. Homebuyers must pay a 10% downpayment and agree to pay a high-interest rate for set period of time, usually about five years.

After paying a dignity subprime mortgage loan for a certain amount of time, the interest rate will be lowered per the current market index and  Federal Reserve market rate. The duration of time to pay the high-interest rate prior to the prime rate varies.

Benefits and Limitations Of A Subprime Loan

The Great Recession that caused a  financial crisis is still remembered today. Thousands of foreclosures due to faulty qualifications for subprime loans were part of the issue.

But with the help of the U.S. Department of Housing and Urban Development and Dodd-Frank regulations, subprime loans have been turned into a safer, more viable option for those with challenged credit.

The benefits of having a subprime mortgage are as follows:

  • Homeownership of your ideal home
  • Mortgage monthly payments will help your credit history
  • Homeownership with a subprime loan may be cheaper than renting

It’s important to evaluate your personal finances. Remember – subprime loans will have a high-interest rate of possibly 10% or more, and a larger down payment may also be required.

When Is Subprime Loan Necessary?

A subprime mortgage loan is an option for home buyers with an imperfect credit history. If you’ve been turned down by a financial institution that does not offer subprime mortgages, we can help you.

If you’re thinking of buying a home, don’t let your credit score hold you back. Homeownership is possible. Buying a  home will improve your credit over time by making timely payments.

We’ve helped countless people in your situation and we’re ready to help you too. Give us a call today or apply now!

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