Mortgage Lenders - Guide to Sub-Prime Lending

jazzynfo | Feb 15, 2010 |

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Mortgage lending is a huge industry with a variety of different types of loans for customers wanting to purchase a property and mortgage lenders providing the service in return for a profit through interest charges. In order to qualify for a mortgage loan, the borrower has to meet certain criteria which includes but is not limited to repayment capacity, credit rating score, credit history taking into consideration credit card spending and repayment history and savings history.

Borrowers who do not match the criteria have their applications turned down; does not mean they don't want to buy the property, they still do. What do such people do to get the mortgage loan? They approach a sub-prime lender who specializes in giving loans to borrowers who do not qualify for a loan from the conventional lenders. Some of these mortgage lenders operate individually; however, you will find that many of them are affiliated to the mainstream lenders but operating under different names. You may be hard pressed to find sub-prime lenders who are still in operation in present time thanks in large part to the global economic downturn.

These lenders do not identify themselves as sub-prime mortgage lenders; the only way you can tell is by the higher than normal interest rates they charge when compared to the conventional lenders.

Sub-prime borrowers are the people who do not qualify for a mortgage loan from a regular lender or prime financier. These people will qualify for a sub-prime lenders terms and will be charged a very high interest rate. The reason being such people are actually a high risk to the lender. They did not qualify for any or all of these reasons, including but not limited to very low credit scores, poor repayment capacity and high debt to income ratio and so on.

There can be other reasons why people don't qualify for loans from prime lenders; for example a borrower who is weak on some points but not all may be approved for a single family dwelling style primary property but not a 4 family dwelling for investment.

The terms of sub-prime lending can be summarized as follows:

Fees and rates are based on the same factors that the prime lenders use. If prime lenders charge higher rates for people with lower credit scores and smaller down payment; the sub-prime lenders do the same. Do not be mislead into thinking that you will get the same deal from a sub-prime lender, as you may have gotten from a prime lender; sub-prime lenders definitely have a very high system of rates and fees because of the high risk their customers pose.

The costs associated with sub-prime lending are a lot higher than the regular loans because of the high percentage of them that go into default, again relating back to the high risk of the clients they service. The costs are also higher because the number of rejected applications is higher as are marketing costs.

Among the borrowers who do not default, the percentage of early repayment or prepayment is quite high. Terms include prepayment penalty clauses, which were mandatory among sub-prime mortgage lenders.