If you’re reading this, chances are you’re on the hunt for a new Mortgage, but maybe your credit history has seen better days.
Don’t worry. This is quite a common situation and for some, a Subprime mortgage is the solution.
Sub-prime mortgages don’t have the squeakiest of reputations and they are not as common as they once were.
The good news, is that they are still available. In this article we will explain what a subprime mortgage is, how they work and how to apply for one.
What is a subprime mortgage?
A subprime mortgage is suitable for people who have experienced bad credit in the past but still need to get a mortgage, this could be to move home or remortgage.
These mortgages come with interest rates higher than a ‘standard’ mortgage and sometimes higher initial fees.
Subprime mortgages are generally provided by specialist lenders. They are different from the high street banks, who prefer to avoid most types of bad credit and take a ‘one size fits all’ approach.
Specialist lenders assess applications individually, taking time to understand what credit issues you have experienced and why.
Subprime mortgages do carry a higher risk for lenders, so they will charge more in interest and usually require a higher deposit of around 20% or more.
What does subprime mean?
In finance, subprime lending (also referred to as near-prime, subpar, non-prime, and second-chance lending) is the provision of loans to people in the United States who may have difficulty maintaining the repayment schedule.[1] Historically, subprime borrowers were defined as having FICO scores below 600, although this threshold has varied over time.[2]
These loans are characterized by higher interest rates, poor quality collateral, and less favorable terms in order to compensate for higher credit risk.[3] During the early to mid-2000s, many subprime loans were packaged into mortgage-backed securities (MBS) and ultimately defaulted, contributing to the financial crisis of 2007–2008.[4]
The term ‘subprime’ is more widely used in the US.
Here in the UK we mostly refer to a subprime mortgage as a ‘bad credit mortgage’, ‘adverse credit’ or maybe ‘poor credit’.
Whatever the label, it is a way of identifying mortgages that are more suited to borrowers with some kind of credit issue.
They could have CCJs, mortgage arrears, suffered bankruptcy or even repossession. Many of the mainstream lenders won’t tolerate these types of past issues.
This means that would-be borrowers need to approach specialist lenders, who understand subprime credit issues and are more likely to approve new mortgages.
Are subprime mortgages risky?
The mere mention of subprime mortgages can take many people back to the financial crisis of 2008. In the early 2000’s, subprime mortgages were incredibly popular, alongside self-cert mortgages and non-status. Lenders were more than happy to hand out these loans and people were snapping them up.
The lenders balanced the increased risk by charging higher interest rates and having more onerous lending terms.
Are they risky? Probably not so much for the borrowers, although borrowed money was far too easy to come by back then.
The risk actually was more for the lenders and the financial institutions and investment banks that bought mortgage related investment products, that ended up being almost worthless. As a consequence, many of those investment banks, such as Bear Stearns and Lehman Brothers, no longer exist. And lenders that had large subprime loan books, such as Northern Rock, are no longer in business.
Things are a lot different now though. Tighter regulation, with an emphasis on affordability.
What was the mortgage crisis?
In 2007-2008 there was a worldwide economic crisis, largely due to the high number of subprime mortgages issued to borrowers who could not afford them. Once people started defaulting on their payments, the whole system came crashing down. Banks, building societies and businesses of all sizes went bust as a result. The UK government stepped in with a number of financial interventions, to try and rescue the banks.
Post-2008, the subprime mortgage landscape changed dramatically. Regulations for all mortgage types were tightened and lenders became more cautious.
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Can you still get a subprime mortgage?
Despite all of the financial problems, subprime mortgages didn’t disappear entirely.
Subprime, or bad credit, mortgages are still available today.
But they are now highly regulated, with stricter eligibility and affordability criteria.
Their main function is still the same: To help people who have experienced bad credit to purchase or remortgage a home.
Eligibility
As mentioned before, all lenders will be looking carefully to make sure you can afford any new mortgage arrangement.
So although you may be eligible in terms of the type of bad credit you have experienced, you still need sufficient income for the proposed loan.
Prime Borrowers: Individuals with strong credit histories and high credit scores. They qualify for the best mortgage rates and terms.
Near-Prime Borrowers: Near Prime is a term used to describe borrowers who fall between Prime and Sub-prime. They are designed for those with less-than-perfect credit. Applications are considered from customers who sit just below the threshold lenders use to identify someone who has a strong credit score.
Subprime Borrowers: Borrowers with significant credit issues, such as defaults or CCJs. Subprime mortgages are available through specialised lenders, but at less favourable terms.
Deposit
A lender offering subprime mortgage terms will need a higher deposit than the typical 5-10%. Most lenders will be happy with 20-30% deposit, but this will also be affected by the actual credit issues. This equates to a 70-80% loan to value range.
Credit history specifics
The lender will want to dig down in to your credit history, looking carefully at any elements of bad credit such as defaults and CCJs. Lenders have their own criteria, based on the risk they are happy taking on. This could mean a maximum CCJ value of £1500. This is fine if your CCJ is for £300 but if the value is more than £1500 you will need to find a different lender.
Income and employment
‘Affordability’ is the new buzzword, so any lender will need you to demonstrate that you have enough income each month to pay the mortgage. They will ask for your bank statements and analyse how you spend your money. But they will also be interested in your overall employment situation, specifically how long you have been in your current job. Affordability isn’t only about how much you earn each month but will include how stable and predictable this is.
How do I apply for a subprime mortgage?
If you’ve explored your mortgage options and believe that a bad credit mortgage is right for you, then it’s time to contact a specialist mortgage broker.
Experienced brokers know the bad credit market inside out and can help you to find the best lender.
They will also guide you on what paperwork is needed and help with the application process.
How can I improve my chances?
Use a mortgage broker.
Most subprime lenders only work with mortgage brokers and intermediaries. So if you don’t use a broker, you’ll probably miss out on a whole range of options from these lenders.
What’s more, applying for a mortgage and then being declined is likely to affect your credit rating. So when you apply with another lender it just makes everything that much harder.
Your mortgage broker will always aim to place you with the best lender first time, with the highest rate of success.
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Alternatives to subprime
If you don’t quite meet the sub-prime eligibility criteria, or you want to avoid the higher interest rates, then there’s a few options that could help.
Bigger deposit
Easier said than done, but a larger deposit reduces the lenders risk, and may open up some further options.
Guarantor
Getting someone else to be part of the mortgage can be beneficial, but only if they have a good credit history.
Boost your credit
Proactively improve your credit score by always making payments on time, keep well within your credit limits and take action to improve a thin credit file.
Wait
Your credit history shows the last six years of credit payments, commitments and enquiries. Your credit score will slowly improve as time passes and the ‘bad credit’ ages. Also some lenders will accept CCJs providing the last 12 months on your file are free of issues.
TOP TIP!
Get a copy of your credit report ASAP. Share this with your mortgage broker so you can discuss together.
How a Mortgage Broker can help
Trying to find a great mortgage deal is hard enough. But adding in the complexity of bad credit means looking for a subprime mortgage can be overwhelming.
Using a broker in this situation gives two clear advantages:
They do the work for you
Let your mortgage broker trawl through all of the different mortgage products and make all of the phone calls.
You get access to more lenders
Most subprime lenders prefer to get their mortgages from brokers. This means you get access to more specialist lenders than you would by yourself.
PLUS
Brokers will help with the application forms and know what paperwork to send to the lenders.
They will then keep tabs on your application, answering any queries as they come up.
Also in this section
Bad Credit
Thin Credit File
Credit Report Guide
This post first appeared on Respect Mortgages - Be In The Know, please read the originial post: here
