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Top 5 Subprime Mortgage Loans in the US

by Jon Silver

Many potential homebuyers may not be sure if they have good enough credit to get a home loan. Actually, lending standards have been loosening for the last three years, and you may find it easier to get a mortgage than you think. It is imperative that you locate lending sources that specialize in subprime loans so you don't waste your time, money and energy. BankRate defines a "subprime mortgage", as a home loan offered to people with credit scores under 620. Typically consumers that have had incidents in which they were reported late paying bills. When people are over 30, 60 or 90 days late making their monthly obligations, there fica score will suffer. For people looking for the best subprime mortgage loans in the US, consider these:

FHA

Many conventional home mortgages are not available to buyers who have past credit problems; they are a higher risk for the lender. However, the Federal Housing Administration or FHA is a great first top to consider if you have average to poor credit. The FHA backs the mortgage that is offered to you by the lender. This makes it easier for you to qualify. Some FHA loan requirements enable struggling borrowers to get a loan with as low as a 500 credit score, although you would have to put down 10% to do so. It is better for you to have a credit score of at least 580; at that point, you should be able to qualify for the mortgage with just a 3.5% down payment. FHA-approved lenders also offer low interest rates, often better than what you could get from conventional lenders.

VA

If you are a veteran of the US military or a current active duty member, you can qualify for a 100% financing home loan that is backed by the Veteran's Administration. Similar to an FHA loan, this government agency will pay back the lender if you default on the loan. This leads to lenders giving quite generous terms to military members and veterans. You can expect interest rates under what the FHA offers, and there is no minimum credit score. The VA has helped millions of veterans become homeowners with affordable zero down home loans. You will still need to prove that you have the income to repay the loan, but a VA loan is quite easy to qualify for as long as you have enough income. The vast majority of VA mortgage loans are offered with zero down payment, so this is a great option for many military members and veterans.

Fannie Mae

This is the Federal National Mortgage Association, and it exists to make buying a home easier for more Americans. Even after the last mortgage crisis of 2008, Fannie Mae had backed nearly 200,000 mortgages in the first quarter of 2015. Fannie is not actually part of the main mortgage market in the US. Its loans come from private lenders. Fannie Mae loans are bought from lenders and they put them into mortgage backed securities. It sells those securities to investors. This makes the mortgage market more liquid.

Lenders then apply to provide loans to borrowers by following the Fannie Mae lending process. You will need to have a reasonable credit score of at least 620 and 640 is better, if you want to qualify for an adjustable mortgage. If you have a credit score over 640, you will be able to get a higher interest rate. You also may be able to do a 3% down payment if this is your first home purchase. If your credit score is under 600, you may be better off with going with an FHA mortgage. You also should stress with either Fannie Mae or FHA that you have made on time rental payments (assuming you have done so).

Freddie Mac

Freddie Mac is similar to Fannie Mae in that its goal is to bring stability to the US mortgage market and to expand the opportunity to own a home to more Americans. It also works in the secondary mortgage market and buys mortgage loans and securities for investing. It also issues guaranteed mortgage related securities. So, Freddie Mac loans also attracts more lenders to the secondary mortgage market and makes it more likely that average to poor credit borrowers can get a mortgage. To get a loan backed by Freddie Mac, you also will need a credit score in the 640 range, as with Fannie Mae. If you do not have that type of FICO score, consider an FHA loan.

Private Money Lenders

There are private money lenders available who will loan money based upon the after repair value of the home. Your personal credit is usually a smaller factor in these types of loans. However, you should know that the interest rate on these loans is much higher – in the range of 10-15%. If you really have bad credit, this could be your only option for the time being. Some subprime borrowers will get a private lender loan, clean up their credit and then refinance later.

subprime loan

How Do Subprime Mortgage Lenders Manage Risky Loans?

It is well documented that after the financial crash prior to Obama coming to office, subprime loans were rare and hard to get. But things have loosened up a great deal, and the US government is trying to make it easier for bad credit borrowers to get a home loan. Government lenders have the ability to extend subprime mortgages because they have accumulated reserves from the mortgage insurance that borrowers pay monthly. In addition to that, they know that the US government will bail them out if they exhaust the reserves, as FHA guarantees these loans. Private mortgage lenders mostly use collateral like equity earned when considering a "refinance" or a more significant down-payment when talking about a "purchase money" transaction. Learn more about Subprime mortgages from the Consumer Financial Protection Bureau.

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