During the housing crisis borrowers with bad credit records were unable to obtain mortgages, but now a small number of lenders are beginning to offer subprime mortgages once again. These types of mortgages are becoming available to borrowers who present a higher credit risk, typically those with scores of less than 640.
The article in CNN Money.com points out that in the past this type of mortgage was often offered to borrowers who were unable to put down any sort of down payment, or who could only afford a very small deposit, and the rates were typically low. Nowadays it’s quite a different story and lenders are charging much higher interest rates of between 8% and 10%. In addition borrowers are required to have a substantial down payment of between 25% and 35%.
In spite of the higher costs of these mortgages it’s proving worthwhile for some borrowers who are either trying to build up their credit records, or to repair credit after being ruined in the housing crisis. These types of loans are tending to appeal to former homeowners as well as young first-time buyers. The type of borrowers taking out these loans often don’t have anywhere else to go as Fannie Mae and Freddie Mac will not back loans given to subprime borrowers. However the Federal Housing Administration will back low credit score borrowers, but since the housing crisis ended it has greatly increased premiums and fees.
The Consumer Financial Protection Bureau aims to protect borrowers through requiring strong consumer protections. For example, these types of loans cannot carry prepayment penalties or interest rates that increase after default. In addition lenders have to provide borrowers with homeownership counseling that is provided by a representative who has received approval from the US Department of Housing and Urban Development. At the moment there are a number of small lenders who are issuing subprime loans, but Wells Fargo has recently decreased the credit scores required to get FHA loans. Now applicants with scores of between 600 and 640 can be approved for a loan through Wells Fargo. These scores are still well within the guidelines provided by the FHA.
Experts point out that the availability of subprime loans will help low income families gain access to credit, as well as many first-time buyers. Even though the interest rates are initially high there’s no reason why these borrowers will need to pay these high interest rates for the duration of the loan. As their credit scores improve they should eventually be able to refinance on to a lower rate.