Understanding Subprime Mortgage Lending and First-Time Home Buyers

It is important for consumers to understand subprime mortgage lending. Some of us think of subprime mortgage lending as something that only happened in prior years, and only affected individuals who could not pay for their homes, but the reality is that the effects of subprime mortgage lending can impact almost any mortgage loan agreement.

What is Subprime Mortgage Lending?

The word “subprime” in the housing industry came to be used for lending that took bigger risks by lending money to those less able to repay the loans. These subprime loans tend to come with some specific characteristics that would help the lender protect themselves against risk, by that could also become extremely expensive for the borrower. In reports on the housing crisis of recent years, officials also found that mortgage loan officers and others often had incentives to pad the interest rates of the borrower, or even to offer “easier” subprime loans in exchange for big upfront commissions, since lack of regulation allowed lenders to pocket large fees from simply writing some of these subprime loans or deferred interest loans that “blew up” later when the borrower became unable to pay.

Subprime Lending and Stated Income Loans

In many cases, lenders offered subprime mortgage loans to less credit worthy customers by evading the requirement for strict financial accounting. In a conventional mortgage, borrowers had to prove sufficient income before getting qualification for the mortgage loan. Stated income loans, on the other hand, allow for the borrower to self-report his or her own income.

It’s important to note that although stated income loans were abused as part of subprime mortgage lending, these types of loans are still on the market as legitimate ways for the self-employed or other kinds of borrowers to get access to a reasonable loan agreement. Not all stated income loans are subprime, and not all subprime loans were of the same makeup. Subprime mortgage lending has become a way to refer to easy loans that carry high interest rates.

What Subprime and High Interest Rates Means for Your Mortgage

The basic bottom line for mortgage lending is that lenders look to get as much interest as possible. At the same time, home buyers and other borrowers are looking for the lowest interest rates possible. Interest on a mortgage loan builds up annually. The higher the interest rate, the more the borrower is paying over the total term of the loan.

Experts caution consumers to look out for subprime lending that includes higher interest rates than a specific borrower would have to pay through the common market. Those who are offered subprime mortgages should also look out for excessively restrictive prepayment penalties and other clauses in a document that could cause them financial hardship later on down the road. Many borrowers who are not savvy about all of the details of mortgage lending, including subprime loans, are advised to rely on a professional financial representative to look over the loan before signing. Good research and oversight will prevent a lot of “subprime” mortgage deals from getting made simply to pad the pockets of lenders who want to circumvent the traditional lending process.