An Alternative to Subprime Loans
Print written by Amy Le on Monday, December 3, 10:32AM
Buying your own home is like a right of passage. For many people it signifies that they've achieved a sense of financial success. During the housing boom, that right was extended to anyone with a pulse, even if their credit scores were in the cellar.
But now with the subprime mortgage fallout and lenders toughening their standards, are there still options for people with damaged credit to achieve the American Dream?
I decided to tap the expertise of an old mortgage buddy of mine. With more than 30 years of experience in subprime lending and FHA loans, Yoda — the nickname I've given him, because of his wealth of knowledge in the industry— offered some helpful insights:
The subprime mortgage market boomed the last 10 years, mainly because it filled a need that Fannie Mae (FNMA), Freddie Mac (FHLMC),and Federal Housing Administration (FHA) loans were not serving. While there is certainly a lot of talk about FHA filling the gap of the subprime mortgages, I am not yet convinced. Some subprime borrowers will be able to qualify for FHA loans, however I do not expect FHA to be as flexible as the subprime lenders were (nor should they be).
What's an FHA loan?
The FHA, which is a part of the U.S. Department of Housing and Urban Development, allows lenders to offer lower interest rates through their mortgage insurance program.
Says Yoda: Today, the FHA plays a critical role in financing for minority borrowers, first-time homebuyers, borrowers who have troubled credit history, and borrowers who have little money to put down on a home.
FHA is a very popular route for the first time homebuyer to take. But it's not reserved only for first time home buyers. You can buy your third or fourth home with an FHA loan. The only stipulation is that you may only have one FHA loan at a time.
FHA mortgage insurance allows a homebuyer to make a modest down-payment (as low as 3 percent) and obtain a mortgage for the balance of the purchase price.
The mortgage loan is made by a bank, savings and loan association, mortgage company, credit union, or other FHA-approved lender. FHA insures the loan and pays the lender if the borrower defaults on the mortgage. Because the lender is protected by this insurance, it can offer more liberal mortgage terms than the prospective homeowner might otherwise obtain. FHA does not make direct loans to help people build or buy homes.
FHA loans do not have to be used solely for purchasing a home; they can also be used to make home repairs or energy-efficient improvements.
30-year fixed rate option
For those individuals who do qualify for a FHA loan, the mortgage instrument will be superior. Basically the current option is a 30-year fixed rate loan at about 6 percent. FHA does offer adjustable rate mortgages (ARMs), however given the current yield curve and pricing, there is no real advantage to an ARM right now. Also everyone needs to keep in mind that it was not always the fault of the subprime borrowers' mortgage that the payments were not made.
So there you have it. Despite a not-so-perfect credit score, the dream of owning your own home may not yet be over. Don't be disheartened by the barrage of news highlighting the mortgage industry's black eye. Look into other loan options and seek out advice from financial experts. But remember, like my mother always says, 'Don't let your eyes be bigger than your stomach.'
Have the current mortgage problems dashed your hopes of buying a home?
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Comments
Rather then looking for alternatives to subprime loans, many people should be asking themselves if they can really afford what they are trying to buy. Hopefully at least some people learned a lesson during this subprime mortgage meltdown -- Don't Buy What You Can't Afford.
I totally agree Jeff. Those who can't afford to buy shouldn't even attempt to buy until they get their house of finances together. But I think there's still hope for those people that are working towards improving their credit history, but don't quite have the scores to qualify for an "A Paper Loan," and want to invest in a home. There were plenty of people that took out subprime loans last year who didn't default and were able to pay their monthly mortgages.
I guess, there are as many different types of problems with subprime loans as there are subprime lenders. I have spoken tomany who have a slightly different problem . I have made on time payments for 27 months, have a 60% LTV ratio, but due to what I would call unethical practices dealt by my subprime lender, I am paying 13% APR and can find no one who can help. I feel there should be help, or at least severe punishment for these practices.
Hi Greg,
Hopefully you'll check back on this page. I suggest you look at the HOPE NOW plan, call the toll-free foreclosure hotline at 1-888-995-HOPE. Even if you're not being foreclosed on, they have advisors on hand to help you figure out how to get your payments down, especially if it is a situation of predatory lending.
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