Sub-prime mortgage loans are a great way to obtain ownership of property or a house if you have less than perfect credit. They also are an even better way to rebuild your credit, particularly if your credit is damaged. If you are serious about owning a home and have less than perfect credit, sub-prime mortgage loans might be the way for you to go.
They come, however, at a price. Over the course of a thirty year mortgage, a sub-prime mortgage loan at an interest rate of 4% higher than average can cost the homeowner almost $300 a month extra. That equates to $100,000 over the course of a 30-year mortgage.
For some, however, sub-prime mortgage loans might be the only way they can qualify for a homeowner’s loan. You do need to be careful though. If you fall into this category, you should shop around to make sure you get the best deal possible that you can.
There are several things to watch out for as you shop around. Check your local Better Business Bureau for complaints about any institution you visit. Also, make sure you read the entire agreement of each institution to make sure the initial rates offered are not “teaser rates” that will default to higher rates after a period of time or if you are late on a payment. You should also make sure that your advisor is well informed of state and federal rules and regulations and is familiar with how sub-prime loans work.
The sub-prime market has earned a dubious reputation because of a few bad apples. These lenders are called “predatory lenders” and you want to avoid them at all costs. Not only are their interest rates higher than normal, but they also usually have much more unfavorable up front costs, payment terms and “trips” that can put you in default quicker than you realize. Those payment terms can be “zero tolerance” in terms of late payments and can result in you defaulting to a higher interest rate as a result of even a minor breach of your contract with the lender.
Caution is the key advice when shopping around. Read your terms of the loan and make sure you ask questions if you are unclear about any part. Also, make sure that you are not stretching your ability to pay over time – sometimes waiting and saving for the future is a better option than spending now and not being able to keep up with your payments down the line.
While getting a sub-prime loan can help you buy a house, you should also consider how a sub-prime loan can help you rebuild your credit. By getting a solid 18 months of payments under your belt, you begin to fix your credit rating. Additionally, check to see if the lender also offers a credit card, using the house as equity. This will allow you to build your credit rating via two venues off of basically the same money. Make sure, however, you can keep up payments on the home and pay off the credit card each month.
Also, as you shop around, consider the lowest monthly payments you can get with a plan of refinancing after 18 to 24 months. This will allow you to build your credit and then “renegotiate” your rate once your credit rating is re-established. That way, you will only have to pay the higher rate for a reasonably shorter period of time.