-advertisement -

Subprime mortgages evolve, offer more choices

By Holden Lewis
Mortgages for people with flawed credit have evolved over the years, and now each loan is virtually a customized mix of rates and fees.

The industry term for a mortgage for a customer with imperfect credit is "subprime" or sometimes "non-prime." But if you're a subprime customer, you won't hear the term unless your broker or loan officer is a terrible salesman. Instead, the mortgage will be called specialty financing or a loan for someone with flawed or less-than-perfect credit.

- advertisement -
"They're going to point out in a professional, customer service-friendly manner that your credit is not pristine and they have programs for you," says Greg Lumsden, senior managing director of Full Spectrum Lending, a Countrywide subsidiary.

Whatever the terminology, the most important advice to give to subprime customers is to shop around when getting a mortgage, because rates and fees can vary a lot among lenders.

Don't be ashamed, shop!

Many subprime borrowers are reluctant to shop multiple lenders because they don't want to face a bunch of loan officers and explain time after time why they have made late payments. But they shouldn't sweat it, say mortgage bankers -- lots of borrowers have credit problems.

"They shouldn't be ashamed by their credit situation, and I think they'll find that there are more and more lenders out there who will give them loans, and they don't have to get a loan from one of the unscrupulous lenders out there," says Frank Sillman, executive vice president of Indymac Bank.

There are many legitimate subprime lenders. Among them are some of the biggest names in the business, such as Countrywide, Washington Mutual and National City. They have the experience and resources to analyze mind-boggling amounts of information in gigantic databases. That's what allows them to offer a set of rates and fees tailored to each subprime customer in a process called risk-based pricing.

The evolution of subprime mortgages

It wasn't always this way. Until usury laws were relaxed in the late 1980s, there wasn't much of a subprime market because lenders couldn't charge rates that were high enough to compensate them for the risk. Subprime was the realm of finance companies and "hard money" lenders.

The next stage began in 1994, when subprime loans began to be securitized -- bundled together and sold as investments. This required lenders to use credit scores to categorize borrowers. They developed an industry shorthand in which subprime customers were denoted by letter grade, as if they were in school: Someone with a credit score of 620 or higher got an A; just below that was A-minus, followed by the riskier B borrower; a C borrower was riskier still, and a D client was really shaky.


PAGE 1 | 2

-- Posted: Nov. 4, 2004

Hard money lenders: the source for last-resort mortgages



8 must-ask mortgage and refi questions


Average mortgage rates and points in the top 10 markets



National Mortgage Rates
Rates may include points.
30 yr fixed mtg 3.65%
15 yr fixed mtg 2.78%
5/1 jumbo ARM 3.81%

  Calculate your monthly payment  
  How much house can you afford?  
  Fixed or adjustable rate: Which is right for you?  

Mortgage Basics
Follow the process from house hunting
to closing.
How much can I afford?
How much is my payment?
What documents do I need?
What is a home inspection?
What is the closing?
Can I remove PMI?

Mortgage rates in your area  
Graph rate trends  
Credit scoring  
Mortgage basics

- advertisement -
- advertisement -