Sub-prime Loans
A sub-prime loan is for borrowers who have bad credit. In theory it is not a bad idea, but because of competitive forces, the program went awry. Here is what a sub-prime was for. Many people have challenging credit because of some event in there life. If a person put 30% down payment, he probably will not le the house go back, even if he has had credit problems in the past. Others need money out of the home because of a business reversal, and had a great amount of equity, but could not retrieve it due to their credit rating, so he needed to borrower only 50% of the value of his house to get in better shape financially. The program was designed to allow time for credit challenged borrowers improve their credit standing and refinance it in two or three years. That is why most sub-prime loans come as a 2/28 or a 3/27 loan.
What happened was everyone was getting a sub-prime loan who had bad credit. At one time some borrowers were offering you a 100% loan (no down payment) with a 560 FICO credit score. In addition, other risk-based features were added like (SISA or SIVA) and in some cases pay option ARM loan features. It is no wonder that this industry collapsed. Unfortunately, this loan product while still available is very limited and in most cases it is easier and cheaper to get a FHA loan, and at much lower costs.
Here is what you can expect from a sub-prime loan today. First most of these loans come in a 30 year amortization. They also generally come as a 2/28 or a 3/27 loan (see the ARM section for details). Most now require 5% or 10% minimum down payment and most have a prepayment penalty where allowed. The credit score for a minimum down payment loan is generally 600 -620 FICO score. If you have a score of 520 or more these loans are available, but the down payment is greater and the rates are very high relative to other products. This loan shouls be used as a loan of last resort.
Advantages:
- If you are in a very bad cash crunch and have tremendous equity in your home, you might use this program to get out of you situation.
- If you have a very large down payment, but because of unforeseen circumstances have a low credit score, you might use this program, if none of the other programs will allow you to qualify.
- The loan can come with a stated income qualification feature.
Disadvantages:
- Sub-prime loans have a very high interest rate.
- You will generally have a prepayment penalty on this loan.
- It is an ARM loan and after 2-3 years your interest rate will likely go up significantly.
- The Margins are generally of 6%.
- The loan is not assumable.
- This loan is to be used only as a loan of last resort.
MCA offers a product to protect you against potential mortgage fraud and over-charging. It is called the Consumer Protection Plan. A Mortgage Professional will review your initial mortgage disclosure documentation and when the loan is ready to close the MCA professional will also review your closing settlement documents to make sure you received the correct program, rate and fees as initially disclosed.
