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Borrower Beware
Sep. 24th, 2009
YUMA, AZ – Sub prime lending by definition is mortgage lending for those with sub par credit scores or credit history, recent bankruptcies, low down payments or less than adequate income and asset documentation.
Borrowers should understand that there would always be higher rates of interest and/or fees to coincide with this type of loan and to compensate the investor for the risk that goes along with such lending. However, this type of product should not be associated with anything other than forth coming honest disclosure from the lender and a plan that will allow the borrower to emerge into a conventional product as quickly as possible. Too often we as lending professionals see individuals that were “sold” a mortgage product in the sub prime arena that consisted of hefty fees and long term prepayment penalties. Investors will accept the additional risks associated with the sub-prime mortgage to earn higher rates of interest for a guaranteed period of time, which is where the “pre-payment penalty” comes in.
A typical sub prime mortgage is a 2/28. This means it is a fixed rate loan for 2 years and then it adjusts annually every year from years 3 thru 30. Generally, this loan will have an associated two year pre-payment penalty. This two year period, is adequate time to re-establish credit, clean up old credit, and show payment histories that are on time and current.
Loan to value is king. If one has a low enough loan to value, it ultimately doesn't matter what kind of credit score the client may have or what income requirements he meets. Loan to value has a huge impact on your success in obtaining a mortgage. Many of the lenders base their decision on the credit score. The higher the loan to value, the more important the credit score becomes. Documentation of income and assets: In the subprime arena, this is more flexible than in conventional A-Paper loans. In fact, many subprime lenders will consider 12 or 24 months of bank statements sufficient for full income documentation. In the case of stated income loans, the reserve requirements are nowhere near what they are in A-paper stated income products.
Loan to value: Loan to value is king. If you have a low enough loan to value, it ultimately doesn't matter what kind of credit score the client have and what income requirements he meets. Loan to value has a huge impact on your success in placing this type of loan.
Credit score: Many of the lenders base their decision on the credit score. The higher the loan to value, the more important the credit score becomes.
Documentation of income and assets: In the subprime arena, this is more flexible than in ?A? paper loans. In fact, many subprime lenders will consider 12 or 24 months of bank statements sufficient for full documentation. In the case of stated income loans, the reserve requirements are nowhere near what they are in ?A? paper stated income products.
With the advent of the internet, est rates are on the rise and many homeowners who have
Derek Egeberg is Certified Mortgage Planning Specialist, CMPSR, with over 9 years of residential lending experience. If you have any further questions on this topic or any other, you can contact Derek at [928-314-1008] or email Derek@TheApprovalCoach.com.
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