The year 2009 gave subprime mortgage lenders a great loss and burn. The well established subprime mortgage lender also felt the loss; Wells Fargo eliminated 500 jobs, and the portfolios consisted of 100% subprime loans of well known subprime mortgage lenders closed shop.
This effected the number of qualifier borrower then in refinancing and then because of short sales foreclosure, and effected the properties. Consumers left with less money and this weakens the real estate market.
What Are Subprime Mortgage Loans?
FICO score and loan-value-ratio decided the type of loan a borrower will qualify and low FICOs, with high rations such as 100% financing, results in subprime loans.
· Subprime loans have higher interest rates then conventional loans (High rated Borrower).
· Subprime loans types like “no documentation” or “stated income” need higher interest rates then traditional loans.
· Many of them are adjustable-rate mortgages.
FICO Score Qualifications for a Subprime Mortgage Loan
Until 2009, lenders made subprime loans for borrowers whose FICOs is less than 620. But now this is raising high like heat. Borrower, who once qualified 620, will see that now the FICOs is 640 and up. Now except VA, most lenders not lend money on 100% financing.
· Leading Institutional lenders like FICO scores above 700, and then borrowers will receive the lowest interest rates.
· Borrowers with FICOs of 600 to 700 will receive less favorable terms.
· And FICO with less than 600 will find it hard to get financing at any interest rate.
FHA loans don’t need FICO score and borrower can get refinancing.
Subprime Mortgage Loan Features
The problem of subprime loans is not only with the lenders but it is the product. Popular subprime loans are often 2/28 adjustable-rate-mortgage or Option ARMs.
· A 2/28 gives the borrower fixed rate for 2 years.
· In the third year rate will change and will be changing frequently for rest 28 years.
· Rates can move 2 percentage points in third year beginning, and adjusts every 6 months.
· Common rates are 6 points over initial rates, like loan at 5% will reach 11%.
· 2/28 loans contains a prepayment penalty, and this is a bad news for those wants refinancing.
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