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Though they represented the majority of home loan defaults that sparked the sub-prime mortgage meltdown in late 2007, sub-prime mortgages aren’t necessarily a bad thing. Much stricter standards have been placed on sub-prime mortgage loans to prevent such a crisis from occurring again.
Is it Possible to Refinance a Sub-prime Mortgage?
For responsible borrowers who still don’t qualify for “prime” mortgage loan terms because of poor credit or no credit history, a sub-prime mortgage can allow you to obtain a mortgage loan and buy a home even with poor credit. During the term of the loan, you can work on repairing your credit, as well as build equity in your home, in order to refinance the loan to a prime mortgage with a favorable interest rate in the future.
In light of the current economic climate, refinancing your sub-prime mortgage loan will not be easy. If you currently have sub-prime mortgage and would like to refinance before the interest rate jumps, take the following steps to help your chances:
Know the Details
You should be aware of the terms of your current sub-prime loan, such as when the fixed rate period ends and how much your payments will increase thereafter in the case of an ARM. Knowing this well in advance will allow you plenty of time to research lenders and refinance options and get approved for a new loan before payments become unaffordable.
Fix Your Credit
The best strategy in taking out a sub-prime mortgage is to qualify for the loan right away and then repair your credit after you’ve obtained your home so you can get a better rate down the line. Just make sure you have actually built your credit back up to a good or excellent rating before you spend your time looking for a refinancing opportunity.
Research Your Options
Contact several lenders regarding your refinancing choices. There are many types of mortgage loans available and you shouldn’t go with the first one you come across. Consider also whether you want a shorter-term loan to avoid paying more interest over time or a longer-term loan that will keep total monthly payments lower.
Working With Sub-prime Lenders
The sub-prime mortgage crisis occurred because irresponsible lenders allowed high-risk borrowers to take on mortgages they could not realistically afford. As housing prices rose but incomes did not, borrowers delayed the consequences of these reckless home purchases by going further into debt in an attempt to pay off their loans. Eventually, most of those borrowers defaulted on their loans and widely-held securities backed by the sub-prime mortgages lost their value.
Not all sub-prime mortgage lenders are irresponsible, though. There have been much stricter regulations placed on lending of all kinds and getting approved for mortgages has become increasingly difficult.
If you are considering applying for a sub-prime mortgage loan, keep the following information in mind about working with sub-prime lenders:
- Look out for scams: A sub-prime mortgage lender is hard to come by these days. If a lender makes you an offer that seems too good to be true, such as no documentation required, it is most likely a scam. Be sure to speak with several lenders and fully research your options.
- Standards are Higher: Because the sub-prime mortgage crisis included careless lending and borrowing, responsible sub-prime mortgage lenders are now much more hesitant to approve loans. You will not qualify for a sub-prime mortgage loan unless you can prove your ability to pay it off.
- Interest Rates are Higher, Too: Be aware that a sub-prime mortgage lender is going to charge you a much higher interest rate on your loan because of the undesirable level of risk you present.
- Know What You Can Afford: Above all, do not apply for a mortgage loan that you know you can’t afford. Sub-prime mortgage loans are expensive–if you find yourself struggling to find a lender who will approve your loan, you are most likely not ready to purchase a home.
Obtaining a sub-prime loan could be your way to home ownership when you are struggling with not-so-great credit. However, these types of loans are much more expensive than traditional mortgages and you may find the interest rates to be too high, causing you to continuously rely on debt to get by. Before taking this route, try repairing your credit before you begin shopping for a home to ensure you remain financially stable for the entire term of your loan.
