How Subprime Home Loans Can Help You Achieve Your Dreams

With lower qualifying criteria and higher interest rates, many borrowers got into subprime home loans but could not continue to pay them. However, if you approach them wisely and they make sense for your financial circumstances, subprime home loans can be the tool you need to achieve your housing dream.

 

If You Have A Low Credit Score

Subprime home loans were designed to help borrowers who might not qualify for a traditional, conventional mortgage. There is always a tradeoff when borrowing money. If lenders view you as a higher risk, they will charge more for loaning you money. 

As a result, subprime loans will have higher interest rates and fees. Loan terms, such as the ability to refinance or prepay without penalty, may be more strict. Regardless, if your income can cover the payments, or the loan can be structured so that it can, a subprime loan can be a reasonable option to qualify you for a loan, even with poor credit.

If Your Income Won’t Justify A Loan

Even with a solid credit score, your income might not be enough to qualify you for a conventional loan. Subprime loans often are structured with a low initial interest rate that adjusts upward after a given number of years, typically two or three.

With these adjustable rate mortgages(ARM), if you anticipate your income growing in the future, you can qualify for a home loan now.

 

If You Want A “Fixer-Upper”

Borrowers with good credit and income still may find a conventional loan difficult to obtain if the condition of the home they hope to buy is marginal. However, many people buy marginal homes, fix them up and so increase their value.

Subprime lenders will not automatically disqualify you from consideration. Again, as more risk is associated with a house in marginal condition, you will face a higher interest rate. But if you believe the increased value you capture for your home can offset that, subprime home loans should be considered.

 

 

If Location Is Less Important To You

Similarly, lenders will evaluate a home’s location when considering you for a conventional loan. If, in their opinion, the amount you want to borrow exceeds the value of a home because of its location, they might not lend to you. Lenders cannot discriminate because of location, but if you find a nice home at a price you are comfortable with, but it exceeds the average value in the neighborhood, lenders can decline your application.

With higher rates to offset the risk, subprime home loans can get you into the home in that neighborhood. You should carefully weigh whether the home’s value justifies the loan. You don’t want to be “upside down” in a home, which means you owe more than it’s worth.

 

If You Need Unconventional Lending Terms

The amount of your monthly payment for a mortgage will depend on the amount you borrow, the interest rate, the length of the loan and the fees. Some subprime loans are structured with longer than typical payout periods. For example, a typical 30-year loan might yield a monthly payment that is too high for your household income. Subprime home loans can be structured for 40 years and, sometimes, even 50 years, which creates a lower monthly payment.

In every case listed above, you must weigh your ability to pay a subprime loan at current and adjusted interest rates; to live within the terms of the loan, which can be more strict; and to stay with loan payments for the life of the loan even if it is longer than the traditional 30 years. Subprime loans aren’t for every borrower. But if it makes sense for the home you want in your financial situation, it can help make a housing dream come true.