How to Get a Subprime Mortgage

The oft-criticized subprime mortgage industry provides home financing to buyers with blemished credit histories. Alhough these you must avoid scams and predatory lending, a subprime mortgage can be a godsend if you have no other options.

Difficulty: Moderate

Instructions

1. Find a lender who offers subprime products. To avoid shady businesses, ask for referrals from anyone you know who has gotten a subprime mortgage. Many of the big, well-known mortgage companies have a subprime division. Avoid brokerages you've never heard of. Check the Better Business Bureau if you're unsure about a particular lender.

2. Choose from the different types of subprime loan. These include interest-only loans, which require the borrower pays only the monthly interest for a set number of years; "pick-a-payment," which requires that you pay a minimum payment or the whole principal and interest amount, depending on your circumstances that month; or adjustable rates, which fixes the interest rate and payment for a period, and then changes according to the fluctuations of the market for the remainder of the term.

3. Accept the terms that you will have to live with in five years to determine whether you can afford the property. Don't buy a home that you can only afford for the first two to five years of the loan. If you can't afford whatever the payment will grow to in five years, don't buy the property.

4. Try to avoid loans with an unreasonably lengthy pre-payment penalty. Most subprime loans have them, and you may find that it's impossible to completely avoid them, but you don't want to incur a huge penalty in a few years if you find that you must refinance because your adjustable rate just doubled.

5. Know that you will pay more for your mortgage than borrowers with perfect credit.

Tips & Warnings

• Find a lender that does all types of mortgages: prime, subprime, FHA and VA. A good lender can get you the best loan based on your income, credit and assets. Even if you're embarrassed about being turned down, it's a good idea to apply for a prime loan just to see if you qualify. You just might catch the underwriter on a good day.
• Remember that, in addition to hikes in the interest rate on adjustable mortgages, your taxes are likely to increase as well, making your payments that much more expensive.

Resources

• Check with the BBB for accredited mortgage companies.