About Subprime Housing Loans

Subprime housing loans are made at higher-than-prime rates. Essentially, these loans do not meet the guidelines set by Freddie Mac or Fannie Mae--major government-sponsored organizations that widely influence the mortgage-lending market. This type of lending is very controversial, and many people equate it with predatory lending practices. However, there are some subprime lending situations in which the borrower benefits and is not subjected to damaging tactics.

The Facts

Subprime housing loans are often the choice of borrowers who cannot obtain housing loans at better and more traditional interest rates. You might peruse this type of loan if you have bad credit (typically a credit score of less than 620), no credit or an adverse financial situation that may cause other lenders to refuse you. You might also be in the market for a subprime loan if you are self-employed and cannot prove your full income or don't make enough money to qualify according to more traditional standards. In some investment property situations, you may need a subprime loan as well.

Risk Factors

This type of housing loan carries risks for the borrower. If you are seeking this type of loan, read the fine print carefully, as some lenders add hidden terms that are nearly impossible for the borrower to meet as well as outrageously steep fees. Once you fail to meet the requirements, you stand to lose the money you put into the property as well as your home. If your mortgage enters foreclosure, you'll also be facing a seriously damaged credit report. If you've put up collateral, you stand to lose that as well.

Misconceptions

Often, people believe this type of loan is only risky for the borrower. But the lender takes on a hefty portion of risk as well. Often working with borrowers who don't pay their bills on time or are not financially stable, these lenders may have a high number of defaulted loans. This is one of the reasons interest rates on these loans are so high.

Benefits

If you understand the risks of taking a subprime loan and are willing to deal with the higher interest rates and fees, you may be able to use one to help you rebuild your credit in addition to securing a home you might otherwise be ineligible for. Once you've rebuilt your credit or established it, you may be able to refinance and obtain a better interest rate and terms. Just watch out for the fine print regarding changing your loan. Sometimes there are hefty fees to pay first.

Features

Though you'll find that much of the talk focuses on the negative aspects of subprime housing loans, these loans often offer some of the same features as other loan products. For example, you could take an interest-only mortgage, paying only interest on the loan for a period of time. You might even opt for a pay-option loan that allows you to choose between a full payment, interest-only payment and minimum payment.