Watch: Subprime loans made simple
How to Qualify for a Subprime Loan
A is designed for people who cannot get approved for a standard, prime loan. Candidates for a subprime program have 1 or more of these issues: low credit score, insufficiently established credit, little or no down payment, the inability to prove income or a high debt to income ratio. Subprime loans carry higher interest rates than prime loans because of the risk factor involved with approving a subprime borrower and also to offset the cost of trying to qualify a high rejection-rate sector of the borrowing community. The interest rate of a subprime loan is actually based on prime, as traditional mortgage loans are, but with points added for risk and cost. If you cannot qualify for a prime mortgage loan, you may be able to get a subprime mortgage. Follow these steps to qualify for a subprime loan.
Call lenders and ask if they offer subprime loans.Ask about their rates and fees, and their cash with the subprime loan, then choose the lender you are most comfortable making a loan application with.
Gather supporting documentation to make your case for a loan approval.This should include:
- Proof of income. Provide 2 month's worth of pay stubs, direct deposit statements and/or anything else that could count as your monthly income.
- Bank statements. This includes checking, savings and money market accounts, and is necessary to prove you have the money for a down payment and closing costs. In some instances, when you cannot provide documentation to prove your income (self-employed, retired, etc.), you may be able to use bank statements to prove cash flow.
- Monthly expenses. Your subprime mortgage lender will want to see at least 2 month's worth of timely payments on all utility bills, rent/mortgage and credit accounts.
Complete the application and sign any necessary paperwork in order to allow the lender pull your credit.
Prepare to be asked by the lender for additional documentation, explanation and/or proof of your ability to repay the loan.Getting a subprime loan approval is not an exact science and you may have to go back to the drawing board several times before your package is considered credit-worthy by the lender.
- Apply with only 1 lender at a time.
- Subprime mortgage loans are based on compensating factors. The idea is to create a well-rounded picture of how and why you will be able to pay your loan back. For example, if you cannot prove your income, you may choose a stated income program, but you will have to compensate for that with either a high credit score or a large down payment.
- Beware of pre-payment penalties that will charge you a fee for refinancing out of your subprime loan before a specified amount of time has gone by.
- Many subprime loans come in the form of an Adjustable Rate Mortgage (ARM). This ARM typically come in terms like 2/28, 3/27 and 5/25, meaning the interest rate you agree to at the onset of the loan if fixed for only the first 2, 3 or 5 years, then will adjust to a prime plus margin rate after the initial term is over. Margins are often very high and result in interest rates that you may not be able to afford. These types of loans are generally considered "band-aid" loans, meaning your ultimate goal is to get yourself out of subprime standing during the initial term in order to refinance into a prime loan before the rate adjusts.
Video: The New Subprime Bubble: Car Loans | The New York Times
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