A sub-prime home loan is designed to service those individuals and families who have credit problems. The severity of the credit problems and the length of the problems will determine whether or not you are a candidate for a sub-prime loan. There are some individuals who may not qualify even for this type of loan.
The sub-prime home loan market often seems to have a life of its own. At times, it is easy to find a sub-prime loan through a lender while at other times, when the market tightens up, it can be difficult to get a sub-prime loan. In other words, there are no guarantees that a sub-prime home loan will be available at all times. Much of that is determined by the overall housing market and borrowers have little they can do to change that other than to wait for the markets to settle down.
Generally speaking, sub-prime mortgages are for those with credit scores under 620. On average, most credit scores will range from 300 to 900, with most working people being somewhere in the 600 to 700 range. Individuals who are always late paying their bills, and especially those who are 30 to 90 days late, will have a much lower credit score. When the credit score falls below 620, the person is considered a sub-prime candidate. Keep in mind, however, that this number can change as the market changes. It may go up a bit and it may go down a bit.
It should be remembered that at times it can be impossible or at least very difficult to get even a sub-prime loan. If sub-prime home owners begin to default on their loans (and this can happen) lenders will often restrict or even eliminate their sub-prime exposure by refusing to take these types of loans.
There are some issues that consumers need to be aware of when considering a sub-prime home loan. Here are some of the more important ones.
Sub-prime loans almost always carry a higher interest rate than traditional loans (which are also known as prime loans). Because the lender is assuming much more risk with a sub-prime borrower the amount of interest that can be charged is often up to the lender. There is no general way to gauge what might be known as the average rate. Each lender that you are interested in will need to be contacted in order to learn the rate they will charge you.
A sub-prime loan may also carry with it a prepayment penalty, a balloon payment, or both. Prepayment penalty fees are charged if the loan is paid off early. A balloon payment requires the borrower to pay off the entire balance of the loan after a certain period has passed, often five years or ten years. If you cannot pay the entire amount when the balloon payment is due, you may have to either refinance the loan or sell the house or go into foreclosure.
Anyone who is considering a sub-prime loan should be aware of predatory loans and predatory lenders. There are several ways someone can cheat you through predatory tactics, and sometimes a lender will combine them in order to confuse you and to maximize profits. Be especially aware of high fees and interest rates that are ultra-extraordinary.
You can take some actions to defend yourself against predatory lenders. Start by finding out what your credit score is from a reliable source. Then ask people for referrals to mortgage lenders whom they trust and have dealt with before. Lastly, make sure that you shop for the best deal and that you check on the lender before you sign up with anyone.