Shopping for Non-Prime Loans
Written by David Reed on Thursday, 13 July 2006 7:00 pm
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Did you just miss getting conventional financing and are being offered a "non-prime" mortgage? Or maybe you're recently out of bankruptcy and are relegated to a non-prime loan? How do you compare non-prime loans?
Shopping for non-prime loans is easy if you know how.
Just as conventional and government loans all follow universal lending guidelines, so too do non-prime mortgages. But most people don't know that, so they think they're fortunate to get financing at any rate. That's not true.
Non-prime loans are the new term for "sub-prime" loans. I guess "sub" has some sort of underworld connotation and quite frankly if I was going to get such a loan I'd rather be "non" instead of "sub." Sub sounds so, well, degrading. Sub-par. Sub-human. Ick.
Non-prime loans are reserved for people who don't quite fit the good credit and nice downpayment mold. If there are any open or recent collection accounts in your credit profile or have just emerged from a Chapter 13 or Chapter 7 bankruptcy, in most cases your loan choices will come from a non-prime list of loans.
First, shop around. When you find out that your loan will be non-prime, get a quote from the lender that provided you with that information, then pick up the phone and start calling around to other lenders or mortgage brokers.
But before you do, you must select the type of non-prime loan to get quotes on. And if you're not careful, you're going to mess things up by trying to compare apples and oranges.
The best strategy for most non-prime loans is to take a hybrid; probably the most common hybrid is a 3/1 ARM. This loan is fixed for three years then turns into an annual adjustable rate mortgage.
But non-prime mortgages are never something to get married to. They're a "band aid" in the world of home loans. If you get your credit scraped and you need home financing, you get a band aid loan. A hybrid. Why?
Hybrids are lower in rate than fixed rate loans. And since you're not going to keep this non-prime loan for very long, why take the higher rate? And that's the strategy, getting into a non-prime hybrid gives you the opportunity to re-establish credit while at the same time
enjoying the benefits of home ownership. After a 24 to 36 month period, your credit should be healthy enough to refinance out of the non-prime loan into a more competitive conventional one.
Another strategy for hybrids, and any other short term loan for that matter, is to refuse to pay discount points or origination charges. Some loan officers automatically charge additional origination fee or junk charges simply because a loan is non-prime. Don't fall for that. As with any other loan offering, non-prime loans also have a no point, no origination fee feature.
Now you've identified the loan you want to compare: a 3/1 hybrid with no points and no origination fees. It's time to pick up the phone.
Make some calls to various lenders and flat out tell them exactly your situation and the type of loan you want:
"Hi there. I need a rate quote on a non-prime loan. I'm needing a 3/1 hybrid without points or origination charges. I'm going to be living in the house and this will be my primary residence."
"My credit score is 574, I have 10 percent down and will need to close in 30 days." Or whatever your situation is.
There. It's that easy. If the loan officer starts to steer you in other directions, don't let him. Non-prime loan offerings can get very, very creative -- meaning more and more loan options from which to choose. Hold your ground.
The reason this works is that non-prime loans are underwritten to the very same standards from one lender to the next. If you're of the impression that non-prime mortgages are reserved only for mortgage brokers or lenders who "specialize" in home loans for damaged credit, you're wrong.
In fact, most every major bank or lender you've ever heard of has a division dedicated to those who have damaged credit. And depending upon who you pay attention to, non-prime mortgages make up nearly a quarter of all home loans issued. They're a common mortgage commodity just like any other loan. So much so that non-prime loans are pooled together and sold on secondary markets just as with any other group of loans.
Non-prime loans have their place. Their place is to help people get back on their feet and re-establish credit. If you shop for rates and keep your origination charges low, you've done the right thing. Now get that loan, pay on time, and move on with life!