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Sub-prime mortgages
By admin | December 4, 2007
In case a person cannot get a loan from a prime lender, or does not qualify because of a low income or a bad credit record, he can borrow money from a sub-prime lender. When a prime lender believes that lending money to a customer may be risky because of the chance that the loan may not be paid, a mortgage may be made to the customer by a sub-prime lender. This is known as a sub-prime mortgage. It is also known as B-paper, second chance or near-prime lending. When a person has a history of having defaulted on loans earlier or has filed for bankruptcy, it generally disqualifies him from a prime loan and he has to look at the sub-prime borrowing market instead.
The terms and conditions of a sub-prime mortgage may be slightly different. Though the factors that are taken into consideration while calculating the rate of interest and other terms as much the same as those considered by prime lenders, the fact that borrowers here are high- risk borrowers does alters the interest rates.
Since more debtors tend to default on their loans in sub-prime mortgages and it is for this reason that the fees and interest rates are much higher than in prime mortgages so that lenders can cover their risks. Many illegal immigrants whose immigration papers are not in order are also disqualified from prime mortgages and thus resort to sub-prime mortgages. This is also so because the costs of marketing sub-prime loans is much higher as compared to prime loans. Most sub-prime loans have prepayment clauses, but on the other hand the requirement of escrow for taxes and insurance is non-existence unlike in the prime-loan market.
Various type of sub-prime mortgages include interest only mortgages where the borrower only pays interest for a period of time, ‘pick a payment’ loans where the borrower is allowed to choose the sum, the interest rate etc and the third, where there is a fixed rate initially which escalates over a period of time.
Thus this market provides an alternative to people who have been turned away by banks and other financial corporations.
Topics: Subprime Mortgages |
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