Increasingly, mortgage companies are witnessing a rebirth of the subprime mortgage market. Subprime loans, loans issued to borrowers whose financial and credit situation is “less than prime” have been around to some degree for a few decades. Subprime loans however had vanished from the existing landscape in the midst of the housing crisis and subprime loans along with the lenders that made them were put out of business or otherwise forced to close.
The wave of foreclosures and subprime go typically hand in hand when discussing the Great Recession. But a few lenders have made subprime loans available again. Should they make a comeback? Maybe. Many say that subprime loans should be banned forever while others say they have a definite place in the mortgage market.
Historically, subprime loans required a significant down payment from the borrowers who used them. Down payments of 40 to 50 percent were common, depending upon the credit grade of the borrowers. Those with terrible credit or a recent bankruptcy could get a mortgage but had to pony up a significant amount of cash upfront to offset the risk associated with damaged credit. If a lender had to foreclose on the property and sell it, the lender could be assured there would be enough equity in the home and not be “upside down.”
However, in the mid-2000s, subprime loans slowly gravitated away from requiring a hefty down payment. Not only did subprime loans require as little as 5 to 10 percent down, they also began to offer “no documentation” or “stated” loans where a borrower’s income or assets weren’t verified. This toxic combination of little down and unverified employment and bank accounts was a key catalyst to the financial downfall. Subprime lenders dealt their own blow.
But some say subprime lending is needed. Bad things happen to good people such as an extended loss of employment, illness or a divorce. Such significant life events can cause anyone to fall into financial straits, all due to forces outside of their control. It’s these people who subprime loans attempt to help; those that need a helping hand to get back to home ownership.
One of the best ways to reestablish a credit profile is to obtain a mortgage and make the payments on time, every time. Without a subprime loan, many home buyers are left on the sidelines.
If subprime lending does make a comeback, it had better stay clear of loose ways. If a borrower is willing to accept a higher interest rate, can provide a sizable down payment and can verify their income to prove affordability, then subprime lending might work. But this comeback needs to be a slow, measured one. We can’t afford another financial crisis.
See if you are eligible for a purchase or a refinance by contacting a knowledgeable loan professional.