Sub prime mortgage loans
Subprime mortgage loans are those loans that are offered to people who are unable to qualify for traditional mortgage loans due to credit history issues or financial issues. In countries like United States, subprime mortgage loans have gained good importance in past few years due to numbers of reasons. In fact, these have become an integral and fast growing component of the overall mortgage industry.
These loans have been criticized also as these have led to great increase in numbers of foreclosures in U.S. Subprime mortgage loans are characterized by higher interest rates, closing fees and other charges, etc. Numbers of subprime loans issued in U.S rose greatly through middle of 1990's to early 2000. Online lending institutions played a very important role in increasing the competition for offering subprime mortgage loans. Even in present times, these sources are considered as one of best sources for fulfilling requirements as their overhead costs are low and thus, they are able to offer loans at low interest rate.
Subprime mortgage loans lenders have been able to attract good numbers of subprime borrowers that are not able to fulfill their requirements at financial institutions like banks and credit unions. As per the U.S Department of Treasury, subprime borrowers are characterized by payment delinquencies, weakened credit histories and severe problems like bankruptcies, judgments and charge offs. Repayment capacity of these borrowers is also reduced as is evident by the credit scores and debt to income ration.
There are also some advantages of subprime mortgage loans. For example, due to these loans, there has been a rise in homeownerships as well as credit opportunities. As per the study conducted, it was found that sub prime mortgage loans have helped about 9 million people in gaining homeownerships, which is really a great number. These people have also been able to use homes for building wealth and in improving their neighborhoods.
Challenges attached with subprime mortgage loans are also considerable. As said above also, numbers of foreclosures have increased considerably due to these loans and even federal government has to get involved for scrutinizing the subprime lenders and for stopping all types of unscrupulous practices. Even standards for the mortgage lending have been tightened by the banking regulators. Main aim is to offer subprime mortgage loans to those people only who can easily afford the monthly payments as well as resets made in the interest rates attached with these loans. It is important to understand here that above loans are generally offered as ARM or adjustable rate mortgages in which interest rate gets reset after the expiry of initial fixed rate period.
A connection between adjustable rate subprime mortgage loans and foreclosures has been found by the experts. Due to interest rate resets, which are not afforded by most of borrowers, numbers of foreclosures have increased greatly and this has made the situation grim.
While getting subprime mortgage loans, one has to be smart as these loans can be termed good as well as bad. If a person thinks he can really afford the monthly payments at fixed rate as well as at adjustable rate, he can go for these loans. By making regular repayments, he is also able to improve his credit history over a period of time. As the credit scores improve, getting further credit facilities become easy.
Subprime mortgage crisis is one of greatest aspect related to subprime mortgage loans. It is basically an ongoing financial crisis and has been triggered by increasing numbers of foreclosures and mortgage delinquencies. This crisis has proved very adverse for financial institutions like banks as well as for financial markets in United States and in other countries across the globe. This crisis become apparent in the year 2007 and exposed the weakness in the global financial system.
Loan to value ratio or LTV and FICO scores or credit scores are two factors that determine the eligibility for subprime mortgage loans generally. High LTV with low FICO score results in subprime mortgage loans. As compared to mortgage loans offered to high rated borrowers, interest rates attached with subprime loans are high. There are many types of subprime mortgage loans available. For example, fixed rate loans, adjustable rate loans, interest only loans, stated income or no documentation loans are some types of subprime mortgage loans offered by subprime lenders in U.S. Interest rates attached with stated income or no documentations loans are even higher.
Most of lenders offer adjustable subprime mortgage loans. If FICO scores are seen, lenders used to offer subprime mortgage loans to people having score of less than 620 up to early 2007. Even there were some lenders that offer 100% mortgage loans with FICO score of 580. Now, situation has changed and an overall lending criterion in mortgage industry has got affected. Even lenders are not ready to offer 100% finance except VA loans. Lowest interest rates and other terms and conditions are offered to borrowers having credit scores more than 700. Borrowers who have credit scores between 600 and 700 get the loan at less favorable terms and conditions. People who have credit scores lower than 600 many find it very difficult to get a subprime mortgage loan. It is important to note here that there is no requirement of FICO score in FHA loan and thus, it may be a good option for people needing refinance.
If features of subprime mortgage loans are seen, most popular loans have been the 2/28 adjustable mortgage loans. This loan allows a person to get fixed rate for a period of 2 years and interest rate changes with 3rd year. Interest rate then fluctuates for the remaining 28 years. Sometimes, a cap is also placed on the interest rate for adjustable rate period as compared to initial rate. For example, a cap of 6% means as compared to initial rate, interest rate can be maximum 6% higher.
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