Ryan’s Mortgage Blog:
I know I wrote about subprime mortgages about a month ago, but it has really affected more people than I anticipated, so I thought I would shed more light on the subject. I wanted to let you know how it may affect you.
A subprime mortgage is a term used to describe an elevated risk loan. These loans are made to borrowers who have bad credit, have shown problems making payments on-time, or have limited money for down payment. In the past these loans were hard to find and uncommon, but over the last 3 – 5 years they became more and more popular. Last year it was estimated that 20% of mortgages were subprime (the numbers are mixed depending who you talk to because people’s definition of subprime is different). One of my old financial text books states that only 4.5% of mortgages in 1994 were subprime. This is a huge difference. We are taking hundreds of billions of dollars here.
Lenders were making money off these loans by raising the rates on the loans compared to conforming loans. As you can see from watching any financial news channel, the subprime market is taking a huge hit. Many companies have gone out of business or losing money daily because of foreclosed homes. These “risky” borrowers weren’t such a good gamble after all.
So how does this affect you? Well, it could in many ways, especially if you are buying or selling Real Estate. When the market was hot not too long ago, people were able to buy and sell homes using subprime lenders. This allowed for a greater number of approved clients, which meant a greater number of people who could “afford” to buy a home. Now many of these options aren’t available because borrower requirements have gotten much stricter lately because of all these foreclosures. This means that if you are selling a home you may have fewer candidates who can afford (find a loan) to buy your home. On the other side of things, if you are a buyer with “subprime” credit your options are limited. So obviously this is another problem for the already hurting housing market.
The stock market is also affected by this since some of the companies/banks in the market have invested in these subprime mortgages over the years and are paying for it now. The consumer buying habits may decrease also, which can slightly affect some companies (it is a stretch). Homeowners have been known to refinance their house and take cash out (using equity) so they could buy things they couldn’t afford with their cash on hand. These rates were much better than using a credit card. Now, some of these same people may not be approved to refinance at the great deal they were before, or maybe not at all. I think you can see where I am going with this.
Right now rates are still good for “A” paper mortgages and you can still find a loan if you are subprime but be prepared for a lot of requirements, worse rates, or maybe having to find a co-signer.
If you have any mortgage related questions please call me at 805-540-0866, or email me at my personal address of RyanBaker500@gmail.com.