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A Subprime Comeback?
You remember the subprime mortgage loans don’t you? The loans that caused much of the trouble contributing to the housing crisis? Yes, they became a dirty word and became synonymous with sleaze in the mortgage industry. But don’t look now; they might be making a comeback.
Subprime lending has been around for a long time and they seem to make an entry in the market then leave, only to make a comeback. Subprime loans are designed for those who have damaged credit in the form of collection accounts, bankruptcies and tax liens.
Historically, subprime loans required a hefty down payment along with higher rates. This combination of instant equity and a higher return offset the risk a subprime lender inherited when making such a loan.
Most subprime loans would require a minimum of 20 percent down with most subprime loans requiring 30 percent down or more. Rates could be anywhere from 5 – 10 percent higher than current market rates. Borrowers who accepted subprime loans took them out knowing it was the only way to get a mortgage but also needed that mortgage to rebuild their credit.
Subprime loans changed in the last decade, requiring less money down than before, in some instances requiring as little as five percent down. To add to that low down payment mix, subprime lenders began to accept “stated” loans where employment or assets weren’t verified. These two changes were new to the subprime industry and changed the nature of them altogether. With little or no equity and no verification of the information on the loan application, it was a recipe for disaster.
Yet on the horizon, there are some companies exploring the sub prime world again. Why? When subprime loans are underwritten properly, fully documented and require a substantial down payment, they might just be an answer for those with damaged credit today. Especially if the housing market has truly hit bottom and values are slowly on their way up.
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