Sub-prime mortgage disadvantages
By Justin Hunter
Mortgages
companies feel most of the effects real estate agents
do. So, the last few years were great for mortgage companies,
breaking record originations and inventory sales.
Now that the housing market has been in a noticeable
“cooling” phase, mortgage lenders have been
suffering along with the real estate agents. As agents
slash prices, hoping for any kind of sale, lenders have
been promoting nontraditional sub-prime mortgages to
entice borrowers who originally were not in the market
to buy a property of any
kind.
Ezinearticles.com writer, Michael Challiner, explains
how sub-prime mortgage risks may outweigh their benefits,
in his article, “Sub-prime Mortgages – Think
Twice.”
The fastest growing model of mortgage loans is referred
to as specialist
mortgages. These mortgages are designed to cater
to and benefit borrowers who do not meet conventional
mortgage borrowing criteria, for any number of reasons.
“In the case of self-employed buyers, the introduction
of self-certification mortgages has made things much
simpler. A statement of earnings is normally all that
is needed, provided the business has been up and running
for couple of years. Normally, a 25% deposit is needed
and interest rates will be slightly higher than usual.
This is just one example of a specialist produce.”
But the mortgage that has captured the concerning attention
of Citizens Advice Bureaux (CABs), is the sub-prime
mortgage. Also known as a credit repair mortgage, sub-prime
mortgages accommodate people with poor credit.
“Unbelievably, there are over 4,000 different
versions of this product on the market. There are variable,
fixed and discount rates. The mortgages are extremely
complex, higher fees tend to be charged, the amount
lent compared to the value is likely to be lower and
interest
rates higher than in the rest of the mortgage market.”
Sub-prime mortgages have a variety of levels and offered
programs. A “light” sub-prime mortgage will
most likely be offered to a borrower who has missed
a couple of loan payments in the past.
If that same person had damaged credit or a history
of bankruptcy, a “heavier” sup-prime loan
would be offered.
“Dependent on the results of the credit rating,
there could be an interest charge of more than 3% on
top of the average standard variable rate mortgage.
There’s a big gap between sub-prime and near-prime.
Another snag is the cost of the fee for setting up the
loan. Commonly there’s a charge of 2 to 2.5% of
the loan.”
The CAB’s concern directly relates to suspicion
that sub-prime mortgage lenders are offering these loans
to people who really cannot afford them, with promises
of lower down payments and rates.
“In September 2005, there was a report by the
Financial Services Association, which voiced concern
over what checks were employed to check the borrower’s
suitability for these mortgages and questioned the advice
given by some brokers. A further investigation to this
is planned.”
Everyone wants to buy a home at one point in his or
her life, but if you obtain a sub-prime mortgage and
are not able to make timely monthly payments, your
credit can be damaged forever along with the potential
loss of your home.
However, if you have bad credit but are sincerely making
an effort to regain stability, owning a home through
the assistance of a sub-prime mortgage and making timely
payments is a great way to reestablish good credit.