How do I choose the best subprime loan?

If you're thinking of shopping for a subprime loan, stop right there!

It's time to start thinking about shopping for a loan. The best terms that may be available to you may be subprime loan terms, but it's best to start by reaching out broadly to as many different lenders as possible and see what is generally available to you.

It pays to shop around. Lending standards can vary greatly from lender to lender, and even if you do not qualify for mainstream lending from one lender, you may very well at another. Remember that lenders are not obligated to tell you that you might qualify for a lower rate elsewhere. If you shop strictly at subprime lenders, you may be limiting yourself to much higher rates than is necessary.

Even if you shop subprime branches of larger banks, they may or may not refer you to their prime lending branches, whereas the prime lending branches are much more likely to refer you to their subprime colleagues if you fail to qualify.

A good place to start is with the bank or credit union with which you already have a relationship. Find out what loan products they offer and see if you might qualify for any of them. If prime lending seems out of reach and you know your credit score, ask if they can give you an idea of the terms you may qualify for. You should also try to shop any other financial institutions with which you have had a good history, and see what their advice may be.

Research and then shop other reputable lenders as well. Many subprime borrowers are embarrassed about their credit history, and are so grateful anyone is willing to lend them money that they stop with the first loan approval. This is usually a mistake, which can translate into significant and unnecessary dollars and cents.

Take your time to compare terms and rates, and don't act in desperation. Even if you are using a mortgage broker, do your own shopping as well. Mortgage brokers are not obligated to give you the lowest rate available. Be cautious regarding any unsolicited loan offers, a practice often employed by "predatory" lenders.

Once you have the available loans in front of you, carefully read all the fine print and ask any and all questions you may have. Now is the time to evaluate what the overall cost of the loan may be, and which terms suit your situation best.

Whatever you do, do not sign your name to anything you don't understand. If you can, have your document reviewed by a real estate attorney or ask a housing counselor with a government agency (such as HUD) for advice.