Buying an Old Home with a Subprime Mortgage

by Francine L. Huff
Old House Web Columnist

If you don't have good credit but are planning to apply for a mortgage, you may want to rethink that. It's getting tougher for people with low credit scores to qualify for subprime mortgage loans as lenders are tightening requirements in the wake of a shakeout in the mortgage industry. As a result, many people who would have qualified for a no down payment, interest only, or "stated income" loan a year ago may find themselves struggling to purchase or refinance a home.

What is a Subprime Mortgage?
Subprime lenders offer mortgage loans to people with weak credit, insufficient assets, or unverifiable incomes. Borrowers with credit scores below 620 are usually considered subprime customers. Subprime mortgage loans carry higher interest rates because of the risk involved with lending to those customers, and those interest rates can vary a great deal from lender to lender. "A" graded mortgages are offered to people with higher credit scores and carry lower interest rates.

Higher Credit Scores Required
Stated income loans were originally targeted at people who were self-employed or had high incomes, but lenders began offering those mortgage loans to people who were eager to own homes even though their credit score was low. Now if you're a first-time buyer and want to qualify for a stated income mortgage, you may need a credit score of at least 700, according to the Mercury News. Also, some lenders have decided to stop offering no down payment mortgages due to high rates of foreclosures related to such loans.

Should You Still Get a Subprime Mortgage?
If your heart is set on purchasing an old home and you think you'll only qualify for a subprime mortgage, be prepared to jump through some hoops. Lenders will likely want more paperwork to verify your income and other assets, as well as a decent down payment. You'll also find it more difficult to qualify for some of the more creative financing options such as interest-only loans.

If you have a low credit score, you may be better off taking steps to improve it before purchasing that old home. Delaying your house purchase will also give you time to save money for a down payment, and to educate yourself about the home buying process and the different mortgage loan products available to you.

About the Author

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.

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