Subprime mortgages
All is not lost if you have a low credit score and a bad credit history, you can qualify for a subprime mortgage if you meet certain subprime lending criteria.
What is a subprime mortgage?
The term subprime mortgage was previously used to refer to bad credit mortgages, but people don’t commonly use it nowadays. You will hear the term used here and there to refer to a mortgage for a person with bad credit history.
The term “subprime” generally refers to borrowers with a below-average credit score therefore subprime borrowers are generally seen as high risk; therefore, they are charged higher interest rates.
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Types of subprime mortgages
Below are the most common types of subprime mortgages:
- Interest-only. The borrower is required to pay the interest on the principal amount first and then sell or refinance the house before they start paying for it.
- Option-adjusted mortgage. This type of mortgage allows borrowers to choose from different payment options each month. The borrower can choose to apply the payment only towards the interest amount, interest and principal, or towards the stipulated minimum amount.
- Balloon payment mortgage. A balloon payment mortgage is a real estate loan that allows the borrower to make minimal or no payment initially but then pays the total mortgage balance in a lump sum towards the end of the mortgage period.
- Long-term fixed-rate mortgage. This kind extends for 40 to 50 years rather than the typical 25 to 30 years. As such, it allows you to make a lower monthly payment, although you end up paying back more due to the extended repayment period.
- Dignity mortgage. A dignity mortgage is a middle ground between a subprime and conventional mortgage. The borrower is required to make a 10% deposit on the borrowed amount. They also commit to paying a higher interest rate on the first five years of the mortgage. If they make all the payments on time during the first phase, their credit history improves and their interest rate is reduced to the conventional mortgage market rate.
Advantages of subprime mortgages
The main benefit of subprime mortgages is that they allow individuals with a low credit score but improved financial status to afford a home. Making your payments on time can be a tool for rebuilding your credit score and gaining equity.
Disadvantages
Subprime mortgages incur high-interest rates as a way for lenders to cover the high risk of giving you a loan. The typical interest rate for subprime mortgages is 5%. However, it can range from 2.5% to 8%, depending on the lender, your financial status, and your creditworthiness.
You can lower your interest rate by making a big deposit, improving your credit score leading up to applying for the loan, and having a credit history that is not too adverse.
If it is an interest-only mortgage, if the house has negative equity at the time of selling, you sell the home at a loss and will have to cover the difference.
Which type of lenders offers subprime mortgages?
Subprime mortgages are mainly offered by specialist lenders. They are less typical among big banks and mainstream lenders. They check your affordability thoroughly to ascertain that you can pay back the amount awarded.
Unlike mainstream lenders who employ a one-size fits all approach, specialist lenders assess applications on a case-by-case basis. They seek to understand the reason for your adverse credit history and establish your current financial status in relation to your ability to afford the mortgage amount you are applying for.
As such, they are more lenient to the causes of economic hardships, such as illnesses, job loss, and separation.
Specialist mortgage lenders are also an excellent option for self-employed mortgages and people with complex income structures, such as contractors, freelancers, and limited company directors. They may consider your mortgage application, even if you have adverse credit issues such as no credit history, CCJs, and defaults.
How to get a subprime mortgage
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Analyse your credit report to determine if you indeed need a subprime report.
Download your latest credit report and look for adverse issues that may qualify you as a subprime borrower. Below are some characteristics of subprime borrowers:
- A credit score of 580-659
- Have a bad credit history
- Do not have a credit history at all
- Have previously been declared bankrupt
- Previously, huge debts led to repossession, county court judgements, and individual voluntary arrangements.
- No being registered in the electoral roll
- Several missed payments on other types of loans, e.g., car loans or credit card loan
- Late utility bill payments
If you are unsure if you are a subprime borrower, download your credit report, have a specialist mortgage broker review it, and establish if you need a subprime mortgage. While you could apply for a regular mortgage to see if you qualify, you do not want to have too many hard inquiries, as it would hurt your credit report further.
While you’re at it, check your credit report for inaccuracies or outdated information that may adversely affect your ability to pay.
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Find a reliable bad credit mortgage broker.
They will help you with your application process and match you with a suitable lender. They will also help you to decide on the type of subprime mortgage to apply for.
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Apply.
Gather all your relevant documentation, including proof of identity, earnings, and deposit. Fill out the lender’s application form and submit all the appropriate paperwork. A specialist mortgage broker will advise on the type of information to include in your application to temper any red flags.
The amount of time it takes for the lender to assess your application and get back to you differs from one provider to another, but, on average, it takes four to six weeks.
The lender will conduct an initial soft inquiry as part of the preliminary approval process. They will then conduct a hard inquiry to establish your creditworthiness and decide whether to move forward with the application completion and funds transfer.
Eligibility criteria for subprime mortgages
The main goal of subprime mortgage eligibility criteria is that you can afford to make the agreed payments. Your eligibility is based on the following parameters:
- Income and type of income source. Most lenders prefer borrowers with a steady source of income. If you have been employed for a long time, you stand a better chance of getting a subprime mortgage. For a self-employed mortgage, potential lenders will assess your finances further. You will be asked to show your accounting, income, and tax reports for the last two years for the lender to determine if you can afford the loan. It may be challenging to be approved for a mortgage if you are a retiree or have just started a new business.
- Credit History. Bad credit history is a significant factor in determining whether the lender will consider you for the loan. They may overlook simple issues such as one to two late or missed payments. However, issues such as bankruptcy, IVAs, and CCJs may make your application difficult to approve. Also, the more recent your incidence of bad credit, the harder it will be to get approved.
- Outstanding Debt. Another thing that your lender will be looking at is if you have any outstanding debt due to issues such as shortfall, repossession, CCJs, or IVAs. Or if you have other types of loans, such as car and credit card loans. Most lenders require a minimum 20 to 30% debt-to-income ratio for you to qualify.
- Deposit. The amount of deposit you can put on your subprime mortgage will influence if your application goes through and how much the lender can approve. The higher your deposit amount, the higher the principal amount you are likely to be approved for and the lower your interest rate.
Alternatives for subprime mortgage
If getting a mortgage is not urgent for you, you may want to wait longer and take time to rebuild your credit score and credit history. The longer you wait, the more likely you will qualify for a prime mortgage, as long as you have a good credit score and history.
Most credit issues fall off your record in six years, and then you are treated like any other borrower who has not had a bad credit issue.
In the meantime, there are different ways to improve your credit history, including paying your bills on time, paying outstanding debts on time, and paying off shortfalls. You can also take smaller, manageable debts and use them to rebuild your credit. Build up your savings and asset base, so you have enough money to deposit for your next mortgage.
t also helps you to pass your affordability accessibility. If waiting is not an option and you do not qualify for a subprime mortgage, ask a family member or a close friend to act as your guarantor on a conventional mortgage.
Consult a mortgage specialist
If you are keen to apply for a subprime mortgage, it is best to consult with a specialist mortgage broker. They know the top subprime mortgage lenders in your area. They also understand the eligibility criteria stipulated by each lender and will match you up with the most suitable one for you as per your needs and credit history.
The broker may also negotiate your mortgage application increasing your chances of securing a loan and getting better interest rates.
FAQ
What is the subprime mortgage crisis?
The subprime mortgage crisis happened in 2008 and contributed to the housing market crash. At the time, lenders were giving people with poor credit histories mortgages with the hope that the financed houses would increase in value within a short time for the borrowers to sell at a profit and pay off their mortgage.
Therefore, lenders did not do background checks or affordability tests to ensure that the borrowers could afford to pay back their mortgage debts. As a result, when the real estate market collapsed in 2008, many borrowers could not sell their houses, and most sold at negative equity. Lenders ended up losing millions.
Since the 2008 subprime mortgage crisis, lenders have conducted thorough investigations to establish borrowers’ ability to pay their mortgage debt. As such, bad credit mortgages are far less common and mainly offered by specialist mortgage lenders.
Can you get a subprime commercial mortgage?
Subprime commercial mortgages are pretty rare and difficult to secure. However, they are not entirely off-limits. Your eligibility will depend on how much you want to borrow, whether you can afford to make the repayments, and how much of a deposit you want to put down.
Talk to a specialist mortgage broker near you for assistance in finding a suitable subprime commercial mortgage and passing the lender’s credibility criteria.
Is it a good idea to take a subprime mortgage?
It depends on your circumstances. If you pass the affordability assessment and do not mind paying the high deposit and interest rate, a subprime mortgage can allow you to own a residential property despite your bad credit history and score.
It would be a great option, especially if a favourable real estate market enables you to sell the house later at a profit. It can also be a valuable tool for building your credit score to allow you to qualify for a prime loan later.
Contact us now for expert subprime mortgage advice.