Here at Volt Credit Union we work hard to make sure all of our members are informed during their financial decision making process. This includes the process of buying a home. There are different types of mortgages that exist for home buyers to apply for. However, the mortgage we’ll be focusing on in today’s blog will be the ‘Subprime Mortgage.’

What Is It?

Subprime mortgages are home loans that exist primarily for borrowers with a credit score below 600. A credit score below 600 often renders a potential homeowner ineligible for a conventional loan. 

This borrowing style is meant to assist those in the process of repairing credit and buying a home. This being said, subprime mortgages generally have higher interest rates and lower payment requirements than conventional loans. 

How Does It Work?

This mortgage is believed to be a byproduct of the Great Recession. Before the 2008 financial crisis, a subprime mortgage was known as a nonprime mortgage.  The mortgage style, and regulations went through a rework after the financial crisis. Subprime mortgages, as they are called today, are now regulated by the Consumer Financial Protection Bureau (CFPB). This has established new rules under the Dodd-Frank Insurance and Reform Act.  One of these new rules consists of the following requirement: before a lender can issue a subprime mortgage, the borrower must follow advice given to homebuyers through a representative authorized by the Department of Housing and Development. United States Urban Development (HUD) approval. In addition, lenders must make subprime mortgages according to standards set by Dodd-Frank. 

What is ATR?

Dodd-Frank’s “ability to repay” (ATR) clause requires lenders to go through a thorough process to determine if potential borrowers will be able to repay their loans on time. If a lender violates the ATR rules, they could be sued or subjected to law enforcement. Therefore, lenders operating in the low-income mortgage industry have a strong incentive to ensure that they are adequately rating borrowers much more than subprime lenders of 15 to 20 years ago. 

Increased Risk For Lenders

Subprime mortgages are often made to borrowers with low credit ratings. Due to this, lenders view this particular loan to be a risk. To offset this risk, lenders may charge higher interest rates and fees compared to conventional loans. Interest rates on 30-year fixed rate mortgages currently hover around 3%, but subprime mortgages can have interest rates as high as 10%. 

Large Down Payments

Subprime mortgages generally require larger upfront payments than conventional mortgages. For a conventional loan, a 20% down payment equals $ 40,000 – but down payment claims on subprime mortgages can be as high as 35%, which equals out to $ 70,000. $40,000 versus $70,000 is a major financial difference. 

Shop Carefully

In all, subprime mortgages are for borrowers who may not have enough credit to qualify for a regular loan. This makes them a convenient option for those seeking it, however, it is important to consider that with this loan buyers could have high interest rates with a lower payment . This means that, in the long run, buyers could end up paying more than they would with any other type of loan. 

Volt Credit Union On Subprime Mortgages

Before applying for a mortgage, consider improving your credit rating for better rates and terms. Also consider speaking with a mortgage specialist that understands both asset management, and financial planning. This will allow you to make an informed decision on what the right mortgage loan will be for you. It’s important to shop around and compare mortgage rates to find the best loan for your situation. If you’re interested in receiving a mortgage loan from us, call Volt Credit Union in Springfield to see if this is the best fit for you. 

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