Understanding the Subprime Market and Property Foreclosures

The media has devoted a lot of attention to the subprime mortgage market and its credit crunch as a rising number of homes find themselves in foreclosure or nearing foreclosure. And there has been a lot of speculation as to what this will mean for the future of real estate and real estate investing, but to understand what may come of the crisis one first needs to understand the crisis and its underlying causes. So what is the subprime market and what is the credit crisis all about?

Simply put, a subprime mortgage is a loan for those who would not qualify for “prime” lending rates, which are commonly the average lending rates. The people that typically are included are those whose credit factors include a low income, inability to provide full documentation to meet the expectations of prime lenders, and most commonly those people whose credit scores are lower than prime lenders consider acceptable. Often this credit score is one below the 650 mark on a FICO credit score. Historically the score of 650 has been a minimum bar for home owners, with 95% of homeowners having scores above this score and thus being eligible for “prime” rates, but in recent years the subprime market grew from just 5% to 15% in a matter of a few years.

Typically these subprime borrowers are considered by the bank to be at a higher risk of defaulting on their loan, and in turn lenders charge higher interest rates for these borrowers. The higher payout for the lenders, cradled with rapidly rising home values created an environment that seemingly was a perfect investment opportunity. Many lenders seized the opportunity to charge higher interest rates on property, assuming that if the loan was defaulted on, the property would have very likely risen in value. To attract subprime borrowers and create an opportunity for them to enter the market many lenders introduced “adjustable rate mortgages” or ARMS. These “honeymoon” loans often started with a introductory period of two to three years that offered a very low interest rates, and many times the lender required the homeowner to put little to no money down on the property. However, after this introductory period of time these adjustable rate mortgages dramatically rose their interest rates to two or even three times their initial rates.

Many homeowners assumed correctly that their rates would dramatically increase, but they also assumed incorrectly that since their property value would have increased during the honeymoon period that the increased value of their home coupled with the equity they had put into their home would allow them to refinance with another lender at the “prime” rates, or at least another introductory rate. When the lending institutions found themselves with a mounting number of delinquent subprime borrowers as rates rose, and it became apparent that too many peoples’ credit has been over extended. Defaults skyrocketed, and the number of lenders willing to refinance a “high risk” loan dropped dramatically, making it harder and harder for subprime borrowers to refinance their loans causing them to add their property to the foreclosure market. This downward spiraling cycle has caused an increased number of foreclosed homes on the market, which in turn dropping home values and eliminated the short-term investment speculation that banks had been using as a safety net.

To combat this downward spiral and cycle of foreclosures, the U.S. Federal Reserve has cut interest rates several times trying to entice lenders to loan more money. And their has been numerous reforms and bills in committee to help reduce the prevalence of predatory loan practices, as well as to help the millions of homeowners that are finding themselves in the middle of the credit crunch. What this means for the short-term future of the real estate market is up for speculation, but most investors agree that in the long-term real estate will rebound and regain its reputation for being a great investment.

Credit Scores For Home Loans

Credit rating plays a very important role in getting a good home loan with favorable rates. There are official and unofficial guidelines for determining how credit scores will affect an applicant’s eligibility. Lenders use your FICO credit score to determine the minimum down payment percentage you have to make in order to get a home loan. This makes your credit report the most important factor to consider when seeking a home loan.

It is however very important to understand the different kinds of loans available so you can have a better idea of which one will suit your needs better. The most common type of home loan, is the fixed rate mortgage. As the name suggests, with the fixed rate mortgage, you are fairly certain of the amount you will be paying every month because the interest rates stay the same for the life of the loan. The disadvantage that you are likely to experience with this type of mortgage is that you may pay more interest than other home owners during a low interest period. In my opinion though stick with the fixed rate mortgage so you’re not surprised down the road.

How your credit score affects your mortgage:

To qualify for a mortgage, you will need to produce documents that show proof of income, credit history, a summary of monthly expenses and assets and liabilities. All of these documents are important to the lender so that they can determine whether or not you are a good candidate for the loan you want. In addition to these documents, lenders will look at your credit report to determine your eligibility for a home loan.

For government backed mortgages, the VA and USDA require lenders to review the entire loan profile of an applicant before making an underwriting determination. There are no minimum credit score requirements but several factors can make an applicant ineligible.

For example, an applicant typically with more than one 30 day late payment in 12 month period or has filed for bankruptcy within the last 36 months is ineligible for a government backed mortgage. Other factors include late rent payments, having accounts that have been converted into collections in the past year and having outstanding collection accounts with no payment arrangements.

Credit scores for home loans:

So, the question you probably have on your mind right now is: What are the minimum credit scores for home loans?

Your FICO score will not only affect the type of loan you can get but also the down payment you have to make in order to be eligible for the home loan. Before you look at the official FHA loan requirements, you need to understand the credit report that lenders use when determining your eligibility. Most people often just use one of the three biggest credit bureaus to get their credit report. Lenders on the other hand use a tri-merge report that they get from all of the three bureaus. If there are 3 credit scores, the middle one will be the representative score and hence what the lender will use to determine your eligibility and down payment.

There are official FHA loan requirements that are set by federal law. They outline how your credit score affects your home loan. Applicants with a FICO score of at least 500 are eligible for a home loan. An applicant with a credit score of 500-579 is required to make a down payment of at least 10% and those with scores higher than 579 will only be required to make a down payment of 3.5%.

Make your Credit Rating better:

Based on the information we’ve covered so far it makes a lot of sense to clean up your credit history before you apply for a home loan. The following steps should help you do just that.

· Check all the information to make sure that everything on the credit report is accurate.

· Eliminate any discrepancies you find as they could hurt your chances of having a favorable credit score.

· Pay off all the existing balances on any loans you may currently have. These one-off payments can be very effective in raising your credit score.

· Try to keep your debt below 30% of your credit limit. This is a good way to keep your credit score up.

Depending on who you talk to or the mortgage product you’re referring to, credit scores for home loans can vary. I know a lot of this information is quite redundant for a lot of you out there. But remember this; we have a lot of young up and comers that sooner or later will be looking at buying a home. If we can teach and educate young people on the proper and most productive way to buy a home then that will hopefully make for a stronger economy. More importantly maybe that will assist in helping our children and our children’s children to never have to go through a housing crisis as we did just a few years ago.

Please go to https://www.HomeLoansForAll.com for more information on FHA loan requirements and to get Pre-Approved today.

How to Get Cheap Home Loans with a Bad Credit

It’s been years since you made any major improvements to your home and it’s about time. Your spouse and children are also urging you to give the house a facelift. So, what do you do? Dip into your savings? Great! But that’s only if you’ve enough stashed away in there. Go in for a regular loan? But you can’t, because you’ve a bad credit history, a difficult to prove income and just no down payment capability. And besides, regular loans are only meant for house construction and not for renovations. So what’re you to do?

Those with bad credit understand how difficult it can be to try and get a loan for buying a home or refinancing an existing home mortgage loan. Although, most loan companies may tell you that if they can’t help you, no one can, that is simply not true. People with adverse credit history may need to put in a little more effort to search out the right home loan, especially with a decent interest rate. Every mortgage loan company varies in its offer for a home loan. A program that is impossible for one company can be very much possible for another. Some mortgage loan companies specialize in home loans for people with less than perfect credit and have more lenient qualifications than others. The key to getting approved for a loan with poor or bad credit is persistence!

Defining home loans

Home loans are not much different from the average loans extended by mortgage loan companies. They’ve interest rates, points and fees. They can be compared online, and they’ve seasonal trends. The only real difference is that, as a borrower with a less than stellar credit record, you may have to pay a slightly higher rate for this loan to negate the mortgage loan company’s increased risk.

Some home loans are specifically designed to help you fund essential home improvement projects. By encouraging you to make improvements to your home, the mortgage loan company helps increase the market value of your property. But, how does a mortgage loan company stand to gain by extending such a loan? Simple, it makes money through additional interest that you pay for this loan.

Thus, it is important to prepare yourself with information about home loans and compare the offers of various mortgage loan companies to make sure you get the best deal.

Advantages of mortgage loan companies

There are a few things you need to know about mortgage loan companies. These companies specialize in providing home loans for people like you, who are in less than ideal situations. For this, a mortgage loan company takes risks that the average bank refuses, namely offering home loans to people with bad credit. If you have bad credit or declared bankruptcy, a mortgage loan company takes a big risk by extending this loan. People with bad credit are seven times more likely to default on loans. As a result, these companies make up for this risk by levying higher interest rates and fees and also ensure they make a profit. But the end result is that you get the loan, which you may not have raised from other avenues. However, the smart thing to do is to cast your net wide while short-listing such mortgage loan companies.

Searching the best mortgage loan companies

It’s important to remember that just because you’ve bad credit, doesn’t mean you should accept the first home loan offer that comes your way. Interest rates and fees on a home loan vary from one company to the other, so it pays to shop. The best way to compare a home loan is to go online. While comparing, remember to enter the same information for each mortgage loan company, since different loan amounts, down payments and income levels affect the rates. This also helps to get a quote for the same risk level.

If you’re planning to purchase a home for the first time or refinance an existing mortgage despite an adverse credit history, you may do well to compare the offers of the various mortgage loan companies before you accept a home loan offer. Certain companies specialize in offering home loans to people who have a high-risk credit history in return for charging higher rates and fees. How much is charged on these loans varies and offers can be quite competitive. Therefore, it is best to compare the rates.

There are several ways by which you can discern which home loan will suit your purpose. A few pointers are:

Check online: Web sites of mortgage loan companies offer a convenient way to gather home loan quotes. Since mortgage loan companies are in competition with each other, they offer their best quotes. In addition, they also extend facilities like online applications and the like. So, spend some time on the net to get the best quotes, it would be time well spent.

Compare rates: The interest rates charged by a mortgage loan company on a home loan are bound to be higher than any other type of home loan, where credit, income and down payment are all optimal. And they can vary greatly. There’re some mortgage loan companies that, for the same set of qualifications, offer an interest rate of 7 percent, which is a bit over the bar, and then there are others who may quote 9 to 12 percent or more. Now, if this is all for the same qualifications, you could be shelling out hundreds of extra dollars a month in payments, just because you didn’t search properly. Make sure not let the mortgage loan companies take advantage of your situation.

Look at the fees: When a mortgage loan company offers you a home loan, be sure to add up the fees from each financing package and compare those with the interest rates. You should also compare closing costs and other fees in the financing package, which at times does add up to hundreds of dollars. Although, adverse credit is likely to result in some fees, it should not be excessive. As a general rule, fees should be included in the price of the home loan. You should expect to pay up to five points for most home loans. There are always exceptions to this, but comparison-shopping should give you an idea of what is reasonable. It is good to remember that fees and terms can be better for borrowers during the off-season.

Cater for down payment: No mortgage loan company will offer a home loan to a person with a bad credit record without a down payment. The larger the down payment, the easier it is for you to secure a home loan. A down payment for a home loan between 5 percent and 20 percent is usually required for people with a credit score of less than 600. A down payment of 20 percent or more will save you from the expense of PMI.

Read the terms: Once you have finalized a home loan offer, make sure you know what type of deal you are getting into. So, be clear about the terms and conditions by reading the fine print. Some mortgage loan companies charge high fees for late or missed payments. While late fees are common, they should not be extreme. You can also get the documents vetted by a lawyer. The point is that you should be comfortable with all the terms before you sign. If you’ve any questions, don’t hesitate to contact the mortgage loan company for clarifications.

Applying for a home loan

The best way to apply for a home loan is through mortgage loan company services. These services can be accessed online. What they do is to take your application and resubmit it to multiple mortgage loan companies. Each application is usually sent to hundreds of such companies asking for the desired home loan. The response varies, but at least four home loan offers are assured for each application. These online mortgage loan company services can help people in almost every state from Florida to California.

The advantage of this process is that most of these mortgage loan companies won’t even pull your credit when you apply for a home loan, which is good since multiple inquiries on your credit report can drop your credit score a bit, and if you have bad credit to begin with, you certainly need to score as high as possible.

Once a mortgage loan company processes your information and finds everything in place, it will forward the documents for your final approval and signature. The whole process is completed in a matter of days.

If you are patient and persistent, you can hope for a home loan from a mortgage loan company that has the least interest, even if you score low on credit.