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 they 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. Here in Canada, sub-prime mortgage lenders are often referred to as alternate lenders, B lenders, non-conforming lenders or simply just private lenders.
Your credit score is determined by applying a calculation to your credit report. A score above 700 is considered good credit. One below 600 is considered bad credit.
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. If you work out of your home, or have a home office, you may be able to write a portion of the interest off of your income taxes – be sure to consult with your accountant.
You can also expect to pay a lender fee on the front of the loan. By charging you a fee 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.
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.
Sub-prime lenders need to know that the borrower has the ability to make payments, but they may not require the same specific income verification documents that are required by prime lenders. For others, relaxed guidelines will mean a greater focus on the property... perhaps they won’t lend over 70% off the appraised value. Still others might overlook a low beacon score for the purposes of approval, but the lower the beacon score the higher the interest rate. Your mortgage broker will help you to navigate the tricky path of alternate lending and find the mortgage that’s right for you.
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Rebecca joins the team with over 20 years of business, investment and real estate experience. A true advocate for the consumer, Rebecca brings you unparalleled integrity with unbiased advice. Phone anytime and discover for yourself just how easy and enjoyable the mortgage process can be.
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