Posted on: 29th Jun, 2004 12:31 am
Subprime Mortgages are home loans that are offered to people with poor credit history, non-verifiable income or high debt to income ratios. These are also known as bad credit mortgages.
Features:
Subprime loan provides an alternative to borrowers who fail to qualify for conventional mortgages. If a borrower already owns a home, he can take a subprime loan that will help to clean up his credit. He may then refinance into a lower rate to pay off the unpaid balance of the subprime mortgage. In case it is a cash-out refinance, then the borrower can repay the subprime mortgage and then use the extra cash to pay off credit card debts, prevent bankruptcy, foreclosure and other liens on the property. This helps him to improve his creditworthiness.
Features:
- Subprime mortgages are available to those with low income and credit score less than 620.
- The interest rates charged on these loans are about 1% - 5% higher than the prevailing market rate. This prevents the risk involved in offering the loan to those with bad credit.
- These loans require larger down payment since they involve greater risk.
- Subprime loans usually have higher loan-to-value ratio.
- Although these loans are offered as bad credit mortgages, yet the borrower's debt to income ratio, employment history, type of property and assets are considered apart from his payment and credit history.
- These mortgages are graded in a range from A- to D, A- being the closest to qualify for standard conventional loan and D implying loans for people with credit problems.
- These mortgages often have prepayment penalty and balloon payment.
Subprime loan provides an alternative to borrowers who fail to qualify for conventional mortgages. If a borrower already owns a home, he can take a subprime loan that will help to clean up his credit. He may then refinance into a lower rate to pay off the unpaid balance of the subprime mortgage. In case it is a cash-out refinance, then the borrower can repay the subprime mortgage and then use the extra cash to pay off credit card debts, prevent bankruptcy, foreclosure and other liens on the property. This helps him to improve his creditworthiness.
My husband and I own a home right now and would like to refinance our adjustable rate to a fixed rate that is hopefully lower than our current rate. We cannot afford the newly adjusted rate. However, our debt to income ratio is high and is making us unable to find a solution. We have always paid our debts on time and without any problem. Could you help us?
Hi,
Normally your debt to income ratio should be around 36 percent. If it goes higher than that then the lenders are less interested in providing the loan or would charge an interest rate higher than normal.
Rowling
Normally your debt to income ratio should be around 36 percent. If it goes higher than that then the lenders are less interested in providing the loan or would charge an interest rate higher than normal.
Rowling
Hi Kristy,
Debt to income ratio is not calculated on whether you are paying your debts regularly or not but upon the percentage of your total income and the total amount of debt you have taken.
If it is high then it means that your debts are more than your income and in the near future there is a possibility that you may not be able to pay for all your debts.
Thanks
Colin
Debt to income ratio is not calculated on whether you are paying your debts regularly or not but upon the percentage of your total income and the total amount of debt you have taken.
If it is high then it means that your debts are more than your income and in the near future there is a possibility that you may not be able to pay for all your debts.
Thanks
Colin
Hi Cristy,
Let me give you an example of how the DTI is calculated:
Suppose your income comes to around $5000 and the debt payments are $1200.
So, the Debt to Income ratio would be: $1200/$5000 = 24%
If the lenders are not agreeing to provide you a mortgage or are asking for a higher interest rate because of your high DTI then you have an option called the 'No Ratio' mortgage.
For qualifying for a no ratio mortgage you need to have good credit score and would have to verify your employment and assets. These make the lender not consider the income information or the debt to income ratio.
In no ratio mortgages income information is not included with the application, so no calculation for the debt to income ratio is done.
Do let us know if you have any other doubts.
James
Let me give you an example of how the DTI is calculated:
Suppose your income comes to around $5000 and the debt payments are $1200.
So, the Debt to Income ratio would be: $1200/$5000 = 24%
If the lenders are not agreeing to provide you a mortgage or are asking for a higher interest rate because of your high DTI then you have an option called the 'No Ratio' mortgage.
For qualifying for a no ratio mortgage you need to have good credit score and would have to verify your employment and assets. These make the lender not consider the income information or the debt to income ratio.
In no ratio mortgages income information is not included with the application, so no calculation for the debt to income ratio is done.
Do let us know if you have any other doubts.
James
Hi,
For no ratio mortgage, lenders will prefer to verify documents on your assets, other debts and employment. They may require that you stay in a particular job for at least 2 years.
However, lenders will charge you a high rate of interest compared to a traditional loan.
Thanks,
Sara.
For no ratio mortgage, lenders will prefer to verify documents on your assets, other debts and employment. They may require that you stay in a particular job for at least 2 years.
However, lenders will charge you a high rate of interest compared to a traditional loan.
Thanks,
Sara.
We are trying to purchase a home in Florida, the mortgage companies say no, we need help fast?
Hello Debbie,
Why are unable to make the purchase? Is it because of your credit?
Why are unable to make the purchase? Is it because of your credit?
debbie, you need to provide more information on why "the mortgage companies say no."
please elaborate - there may be help available if you do.
please elaborate - there may be help available if you do.
Yes what company's have been declining you? Have you looked at an FHA loan?
I agree with Gmakerly there should be some reason for denying the loan and until and unless Debbie makes us aware of it, how can we help.
There is always a reason why and always a way to get it done. Kristy is it possible that you could refinance and get cash out to pay off debt which would bring down your debt ratio?
Another alternative would be to look at an FHA loan. From what you are saying, you have continued to pay your debt on time. Rates have dropped today. Another factor we need to consider is your loan to value.
Stephenie Marshall
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Stephenie Marshall
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I am an FHA Lender and FHA Loans are the way to go. They are structured with the borrower in mind rather than the lenders pockets. Stephanie hit the nail on the head. Rates are around 6% now for FHA so check it out!
Hi Kristie,
Your debt to income ratio can go as high as 50% or more just depending on your credit, equity and assets that you have. With 30 year fixed rates in the mid 5's, this might be enough to qualify you.
Your debt to income ratio can go as high as 50% or more just depending on your credit, equity and assets that you have. With 30 year fixed rates in the mid 5's, this might be enough to qualify you.