Reduce your risk of becoming a victim of predatory sub-prime lenders

A sub-prime lender is a bank or lending company who lends money to those who may not qualify at a mainstream lender’s for whatever reason. One example why a borrower might be denied a more preferable prime loan might be that their income to debt ratio is too small-- meaning that the borrowers are attempting to take out a loan they can’t afford to pay off. Other times, borrowers fail to qualify for mainstream lenders because their credit is perceived unworthy. Though there is no exact definition, it’s generally recognized that having a FICO score below 680 is considered sub-prime, or below ideal. It is very difficult to identify sub-prime lenders. They are often affiliated with mainstream lenders operating under different names. Talk about misrepresentation! Sub-prime lenders almost never identify themselves as such, and therefore the only way to identify a subprime loan is to examine the conditions of said loan carefully for fluctuating, or floating, rates in the fine print.

What Sub-Prime Lenders Do

In order to compensate for the perceived higher risk, sub-prime lenders will charge high interest or even allow the interest rate to vary (float). This is called an option ARM (Adjustable Rate Mortgage) mortgage. The adjustable rates are often tied to inflation, COFI (Cost of Funds Index) and other economic indicators, but sometimes the rates may fluctuate for more arbitrary reasons at the bank’s discretion. Such loans, while easier to obtain, often prove to be a terrible financial burden for the borrowers. In recent months, these sub-prime mortgages have forced many into bankruptcy, ultimately property foreclosure, and the lifetime of savings they poured into their property investment shot.

There are many exogenous factors that may affect the interest rate of the loan. Interbank lending liquidity and inflation are among the greatest factors. If inflation is climbing, as it was in the early 1970s, 30-year mortgages are typically far more expensive. The banks believed that inflation would erode the value of the loan at the 30-year term, so banks were forced to charge high premiums to cover the changing value of money over time. As inflation stabilized in the 1980’s and 1990’s, many borrowers re-financed their mortgages in search of lower premiums. The process of refinancing meant that another lender would pay off and terminate the original loan while the borrowers would take out a separate loan from the new lender at a more favorable rate. Another financial decision to consider with long-term mortgages is a reverse mortgage from a reverse mortgage lender. More of a final way to refinance, a reverse mortgage is designed for seniors in the twilight of their lives who want to release the equity they have in their homes, an ideal decision if they don’t want the hassle of selling.



Can Sub-prime Lenders Be Beneficial?

The social phenomenon of sub-prime mortgages has not been entirely negative. They have allowed many people to take mortgages who would have otherwise been excluded from doing so, a socio-political cause that pleased those who rally for home ownership as the pathway to prosperity. The inherent problem is that many sub-prime borrowers would have otherwise qualified for regular, more preferable, prime mortgages if they had taken the time and effort to find an appropriate lender. In 2006, according to the Wall Street Journal, a staggering 61 percent of all those who received subprime loans could have qualified for conventional prime loans. Furthermore, grubbing sub-prime lenders have no incentive to give up a potential commission by “steering” qualified prime borrowers to prime lenders who could provide them with reasonable rates. Additionally, sub-prime lenders aggressively market to those who already have sub-prime loans; for example by pitching sub-prime home equity loans to those who are already saddled with sub-prime mortgage debt. This is why sub-prime lenders are often characterized as predatory, and in some cases hard to discern for their congenial front.

Here are some guidelines to help you avoid sub-prime abuse:

1. If you’re being solicited for a loan, it often means that sub-prime lenders are targeting you for exploitation. Don’t respond favorably to solicitations from lenders without carefully examining all of your options.

2. Check to see if you’re eligible for mainstream lending from a qualified Upfront Mortgage Lenders such as homeloaninc.com or NationalMortgageAlliance.com. Fill out our free contact form today, and get all the answers you’re looking for right now.