Why Sub-prime Mortgages Are Being Offered?
A sub-prime mortgage is a type of loan provided to the individuals who have a poor credit history
. Due to poor credit history individuals do not qualify for the conventional mortgages (prime mortgages) and the lenders also feel reluctant to give them property on mortgage as they fear they would not get back the mortgage amount and will have to go for foreclosure of property in future. Due to this situation the mortgage companies offer a sub-prime mortgage to the individual with poor credit history. The interest rates are higher in sub-prime mortgages than the normal mortgages. Therefore it is always advised to go for a normal mortgage rather than going for a sub-prime mortgage. But the people who fail to qualify for prime or normal mortgages have no option left other than to go for a sub-prime mortgage. The reason why the interest rates are high is that the risk is higher for the lenders to provide property for mortgage. That is why they keep them self at the benefit.
Most sub-prime lenders are independent but some conventional lenders also provide the facility of sub-prime mortgage to the people. Most of the lenders follow a criterion to analyze whether a person qualifies for a prime mortgage loan or not. They look up to the credit history of the individual, check the employment history and the total assets of the individual. Normally they disqualify an individual if the mortgage payment per month is above 40%. They then offer an individual to go for a sub-prime mortgage.
The houses which are offered for sub-prime mortgage are not in as good condition as those offered for prime mortgage. Lenders assume that the people with poor financial condition just need a house and they do not need a standard house.
The worst thing about the sub-prime mortgage is the high interest rate whereas the good thing is that an individual gets a house and enters into the real estate market. If a person enters into a sub-prime mortgage contract and then after sometime his credit history and financial condition gets better he can offer the sub-prime mortgage lenders to shift him to the conventional mortgage terms again. For that they take an amount as down payment and reduce the interest rates. The prime mortgage has higher down payment and low interest payments whereas the sub-prime mortgage has low down payment and higher interest rates. Therefore the lenders take some amount as a down payment and shift the deal to prime mortgage.
by: William
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