Subprime Mortgage Lending - What's Good About It?

In recent months, the media would lead us to believe that the risks and damages possible in subprime lending have ruined everyone who has chosen this kind of mortgage. While there have, indeed, been many catastrophes in this area, not all cases of subprime lending fall into this category. Some subprime lending benefits do exist.


Someone who borrows at a subprime rate pays a higher rate of interest than the "prime," or currently normal, rate of interest. Often, the only way people with a poor credit score (FICO, or Fair Isaac Corporation score) can obtain a mortgage is by borrowing at a subprime rate. But perhaps your credit history is compromised because of a past circumstance that is behind you. Maybe temporary unemployment, a divorce, or some illness in the family that ran up your bills was the cause of your credit problem. You are, nevertheless, still considered to be a subprime borrower.

However, here is some information on how you may still reap the advantages of subprime lending, even if your past credit history hasn't been the best. You, too, can get a mortgage and become a homeowner. People whose credit ratings indicate past problems are classified as subprime borrowers, simply because the risk to the lender is perceived as higher than normal. But subprime lending is sometimes called "second chance" lending, and that's because subprime lenders give responsible individuals a second chance to improve their credit.

The most important thing to remember if you are one of those individuals is: do not buy a house you cannot afford! You may be told that you "qualify" for a higher mortgage on a more expensive house. Pay no attention to that information. Buy the house whose costs you know you will be able to handle.

Let's look at an example. You are currently renting a house at an amount with which you are comfortable - say, $1,000 a month. With that rental payment, you have still been able to put something away monthly toward a modest deposit on a new home. You have a rather poor FICO score, and so are classified as a subprime borrower. When you meet with a lender to discuss a mortgage, you're told that you "prequalify" for a mortgage of $300,000. Consider what buying a house in the range of $300,000 would mean to you.

Besides the mortgage, there will be property taxes and homeowners insurance to pay. You'll probably want to consider a fixed-rate 30-year mortgage: what will the subprime rate on such a loan be monthly? You'll find it significantly exceeds the $1,000 you are presently paying, which is within your budget! The smart thing to do is to forget about that maximum amount for which you qualify. Don't let a broker convince you to purchase a bigger, more expensive home than you could afford. You will be able to find plentiful bargains in the present real estate market. Look for those, do the math, and find something that's not going to cost you much more than what you pay now in rent. Budget carefully, and always keep that budget in mind when you're looking at houses.

Subprime lending does have its risks, that's true. But there are benefits as well, especially for people whose credit may have been compromised. Make absolutely sure you understand everything you sign, keep focused on your budget, and you'll be one of the folks who gets a second chance through subprime lending!

Jane A. Smith