Sub-Prime Mortgage Loans

If you have less than stellar credit, you may be a candidate for a sub-prime mortgage loan. So, what exactly are they, how do the work and should you apply for one?Traditionally, the loan industry was fairly static. To get a loan, you needed a history of employment, adequate income and good credit. As the loan industry has matured, it has started developing programs for people that did not fit this profile. For those with credit problems, programs known as sub-prime mortgage loans slowly evolved. Your credit score is determined by applying a calculation to your credit report. A company called Fair Isaac Corporation makes the calculation. The resulting score is known as your “FICO Score”. A score above 713 is considered good credit. One below 600 is considered bad credit. The average score for Americans is 725.Borrowers with a credit score that falls below 620 are candidates for sub-prime loan loans. Sub-prime mortgage loans work more or less the same way as a traditional loan. The primary difference has to do with risk. Because you have poor credit, the lender considers you to be a risky bet when it comes to paying back the loan. This manifests in the loan in a couple of ways.First, you can expect to pay a higher interest rate on the loan. The rate can be anywhere from one to four points higher depending on your specific situation. The reason a lender charges you more is it expects more profit for taking a chance on you. Fortunately, you will be able to deduct your interest payments on your taxes.You can also expect to pay points on the front of the loan. A point equates to one percent of the loan. By charging you points up front, the lender is again trying to limit its risk. In practical terms, it is trying to get as much money up front as possible. When evaluating your sub-prime loan option, points are something you really need to focus on in relation to your budget. As with the interest you pay, points are tax deductible.It is extremely important that you understand that sub-prime loans vary widely. One lender may be offering interest rates terms that are as much as two percent higher than another. If you are considering a sub-prime loan, you are highly encouraged to use a loan broker to shop through the various loan programs being offered. Saving even one percent on your interest rate can save you $50,000 or more on the loan.