Everyone wants to qualify for
loans at the lowest interest rates and with the most favorable conditions, but
for those with severely blemished credit reports, the odds of doing so are rather
bleak.
Like the lost soul in the popular
TV commercial, having a 619 credit score is not great, but it's
also not the end of the world. If you fall into that category with
a credit score dipping precariously below the 620 mark, subprime
lenders who offer loans with higher interest rates may be your best
option for buying a home, refinancing or opening a line of credit.
However, you will have to pay the price.
"There's a place in the market now that allows
people with either bruised, blemished or no credit to find a way
to get some financing," says Catherine Williams, vice president
of financial literacy for Houston-based Money Management International.
While the subprime market may have evoked images of
a seedy broker fielding rejects from major lending institutions
in years past, the market today has become so profitable that such
industry giants as Chase Manhattan, Bank One and Wells Fargo have
opened subprime divisions. Along with the large banks, you can get
a subprime loan from such entities as credit unions, mortgage brokers,
mortgage companies and payday lenders. According to the Federal
Reserve, the number of subprime mortgage loans issued grew seven-fold
between the years 1994 and 2002.
The subprime lending industry has been under fire
for targeting certain groups of minorities, including African Americans
and Latinos, who both are more likely to have subprime loans than
whites. Federal regulators recently said they would investigate
a number of subprime lenders across the country to make sure their
loans are not discriminatory.
Studies also have shown that consumers with subprime
mortgages are more likely to go into foreclosure. A study released
this year by the Center for Community Capitalism at the University
of North Carolina at Chapel Hill found that the percentage of homeowners
with subprime loans that had gone into foreclosure in the fourth
quarter of 2003 was 10 times higher than the rate of foreclosure
among homeowners with prime loans.
Who needs them?
It
isn't only people who have low credit scores who may be interested in borrowing
from a subprime lender.
"People who have trouble documenting their income
because they're self-employed need subprime loans," says Janette
E. Jones, mortgage consultant for American Home Mortgage in Bethesda,
Md. "People who are looking for creative financing or who need
creative ways to structure their finances and payments need subprime
loans," she adds. Think interest-only and some other balloon-payment
loans.
However, you're going
to pay a higher interest rate for the loan, which isn't unreasonable since subprime
lenders are taking a larger risk on you if you have less-than-impressive credit
or little income documentation. Even if your credit rating
isn't as high as you'd like it to be, don't assume the only loan you'll qualify
for is through a subprime lender. | 
