Subprime mortgages are devised specifically for those with bad credit who have no access to the prime market due to bad credit histories. Many subprime products have prime lenders backing them that do not want to be associated with the sub prime market. The rise and demise of subprime mortgages in the US has resulted in limited availability, with fewer subprime lenders servicing loans, and much tighter criteria than prior to the housing crisis.
Bad credit severely limits the options available to potential home owners as traditional mortgage lenders are not interested in advancing mortgages to high risk borrowers. Subprime mortgages proved to be a disaster when extended with little thought of loan to value of mortgaged properties.
Previously mortgages were available from subprime lenders at 100% loan to value: now the few lenders still catering to bad credit borrowers demand down payments of approximately 40% or more. Many subprime lenders were affiliated with traditional mortgage lenders and have disappeared or gone bust. Current subprime mortgages are primarily available through brokers and are not readily obtainable
Bad credit is still acceptable to qualify for subprime mortgages but the high down payments required present problems for borrowers. Those who do raise the necessary down payments will have to pay higher than normal fees, brokers’ fees and high interest rates. Penalty clauses will severely limit the options of re-financing to a better deal once credit histories have improved. Strict criteria will be imposed and the days of easy bad credit mortgages are a thing of the past.
By all usual standards of mortgage criteria it could be considered that Federal Housing Association guaranteed backed mortgages are sub prime. Even with tightened qualifying criteria mortgages are still available to those with FICO credit scores above 500. Only a 10% down payment is required from those with low FICO credit scores of between 500 – 579, and a credit score of 580 and above requires only a 5% deposit.
There are other criteria which FHA lenders demand as well as credit score numbers but the loan to value necessary still makes such mortgages high risk. They do represent a good way for those new to credit to purchase a home with a low deposit, but there is an increased risk of negative equity if property prices fluctuate.
Potential purchasers are better advised to improve their credit rather than rely on subprime mortgages which they may then find difficult to extricate from due to hard penalty clauses. Subprime mortgages cost borrowers far more in the long term due to higher interest rates and fees which could be avoided by biding time and improving credit.
Source: fha.