The overwhelming majority of people wanting to buy a home will not be able to purchase one without first finding a lender to grant them a loan. In case you didn’t already know, a home loan is commonly known as a mortgage.
Having a good credit score when applying for a mortgage will normally result in the finance company offering you a lower rate of interest. In some cases lenders will not even be willing to consider granting a loan if you have a poor credit score. Lenders view bad credit scores as a sign that the borrower may default on payments.
There are other options available if you are turned down because of your poor credit score. There are mortgage lenders who specialize in offering loans to high risk borrowers. These high risk lenders offer a special type of loan called a subprime mortage.
Subprime lending is not without an element of risk for the borrower. Because a subprime mortgage is frequently the last option for risky borrowers, lenders can take advantage.
Companies That Deliberately Mislead
They take advantage of the fact that many people do not bother to read the fine print and bump up the rates dramatically at a later date. Unfortunately the subprime market has been exploited by these companies.
Taking out a subprime mortage has been the cause of many home foreclosures. Inevitably borrowers fall behind in their payments, often resulting in foreclosure.
First Time Buyers – Watch The Fine Print
New buyers are enticed into subprime mortgages by lower rates. Don’t be fooled by the lower initial rate as they may rise steeply at a later date. For these reasons it’s vitally important that you read the fine print very carefully to ensure there are no hidden surprizes down the line.
Here’s some background information on how the collapse of the subprime market precipitated the financial crisis. When borrowers could no longer keep up with their mortgage repayments, thousands of home owners went into foreclosure. Many of the subprime lenders were unable to recoup their money as the housing market collapsed. Many banks and companies also suffered losses as they had speculated in the subprime market on a large scale.
A subprime mortage mortgages can work, but the borrower must ensure they can afford the true cost of these mortgages. In other words, poor credit scores mean higher cost mortgages in the long run. There is no need to be afraid of subprime lenders. Just stay away from the crooks who are only out to get your money.