Are Subprime Mortgages Bad Loans?

There are news stories reporting on how subprime home loans put families in financial jeopardy and are the cause for most foreclosures. Are sub prime mortgages such bad loan programs that one should avoid at all costs?

Subprime Mortgages are designed to help home buyers who do not qualify for conforming loan products. Sub-prime home loans help many people with poor credit history purchase homes, many requiring little to no down payments.

The term "subprime mortgage" has developed a negative connotation primarily due to heavy media coverage of the Wall Street companies who have invested heavily in the mortgage sector and the money they are losing for being overzealous in their investments. Don't let corporate greed and the media frenzy put a label on you.

If your credit is less than perfect, but you can afford to purchase a home, the forgiving and flexible guidelines currently available in the mortgage industry offer you an opportunity to begin building equity in your own home instead of wasting your heard earned money on rent. But don't let that opportunity become a liability by biting off more than you can chew. Don't bend to the pressure of buying as much house as you can afford. Think conservatively about how much you can comfortably afford even if times get tough, plan to make a downpayment, and save as much money as possible prior to purchasing the home. Improving your credit prior to purchasing a home can also help you escape the "subprime" label entirely, and may be the best investment you can make in your financial future.

Subprime Mortgage has a negative connotation because "sub" means "under" while "prime" means "greatest." However, subprime is a very broad term used regularly within the mortgage industry to categorize loan risk. Mortgage loans are typically classified as A, ALT-A, and SUBPRIME. "A" loans carry the least amount of risk while "SUBPRIME" carries the highest amount of risk.

Sub prime loans gave many people the opportunity for home ownership, and many people have financially prospered from having a sub prime loan. The loans themselves did not cause the problems we are seeing today. The real problems lie in the real estate market themselves and depreciating home values.

Subprime loans, if used properly, are an excellent vehicle for a consumer to improve their financial position immediately. Many former subprime borrowers have improved their credit rating and have since moved into the "prime borrower" pool. This is often accomplished by using subprime financing as a means to solve ones immediate financial needs.

Sub-prime mortgage is a wonderful tool in helping to put people with blemished credit in their dream homes which they otherwise would not be able to acquire, because neighborhood retail banks would likely turn their loan applications down, due to their less than perfect credit history.

In addition to making them homeowners, having a subprime mortgage can also help rebuild their credit profiles, provided they remit mortgage payments punctually, as mortgage payment history weighs heavily on credit scores.

Subprime mortgages are where a mortgage broker really shines. Your mortgage broker will have access to many more programs than your local bank. In most cases, a bank simply will not be able to approve a mortgage application for a buyer who has various special needs, including bad credit, no assets, no rent history, spotty job history. A mortgage broker, however, helps these types of customers find attractive mortgage loans every day.

Subprime mortgages can be looked at as a "band aid" loan. If your credit isn't in the best shape because you are having trouble swinging your monthly payments on time, consider consolidating some of your debt to lower your monthly payments. Your Mortgage Consultant can show you the best band aid loan for you so you can make all of your payments on time and refinance into a conforming loan once your credit is repaired.

» DISCLAIMER: The information contained in this article on 'Are Subprime Mortgages Bad Loans?' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.