3 Home Financing Options for Subprime Borrowers

Subprime borrowers have many options, both federal and private, to get out of a mortgage contract they can no longer afford. A sub-prime mortgage is one that was made under the national prime interest rate at the time it was given. Then, the rate was set to adjust in the future. The problem arises because most of these loans adjust to a rate that makes the mortgage payments unmanageable. Some borrowers got pushed into these loans by predatory lenders; others made mistakes when estimating their ability to afford a home. In any case, you can avoid foreclosure by refinancing the mortgage.

#1 FHA Refinance

The Federal Housing Authority will help victims of predatory lending who can no longer afford their mortgages avoid foreclosure. This option will result in the lowest cost to the borrower. However, it is also the option with the most strict guidelines. In order to be eligible, a person must:

  • Have received a subprime mortgage
  • Have been making regular payments on the mortgage before the rates adjusted
  • Be unable to afford the payments at the new interest rate
  • Be able to afford the mortgage if the rates do not adjust to the higher point

This basically means that only people who can afford the homes they are now in are eligible for this federal choice. It is not meant to help those people who have taken on a mortgage that is simply too large for their income.

#2 Private Refinance

If you are not eligible for or do not want to elect the FHA refinance option, then you may seek a refinance loan through a private lender. In some cases, your existing lender may be willing to refinance the loan. This will only happen if you are facing foreclosure and bankruptcy and the lender feels they will not profit if you fall into these circumstance. In most cases, however, you will need to seek a new mortgage lender. If your credit score has dropped as a result of your current mortgage, it may not be possible to get a private lender to extend the loan at a lower interest rate than you are currently facing. Even if the rate is higher than you would like, it may still be worth considering refinancing if you can find a fixed rate mortgage. This way, you will be assured your rate will not go up in the future.

#3 Cash out Refinance

Some borrowers may need some cash to help them make the first few mortgage payments to the new lender or make repairs to the home. One option you can pursue is a cash out refinance. This allows you to take a new loan at a higher amount than you still have remaining on your existing mortgage. Once you pay off your existing lender, the extra cash will go into your pocket for the expenses you see fit. Of course, you will have to pay this money back, plus interest, and you are losing some equity in your home. However, this option can make fiscal sense to some borrowers.