Subprime Lending - An Unsound Home Loan Lending Practice
We've all seen the advertisements "bad credit mortgages" or "no credit bad credit home loans" while enticing and admirable in allowing people to realize the American Dream and own their own home it's not the most financially sound practice. Recently we've all seen the impact on our largest home loan-lending corporations such as Countrywide Financial and Citigroup, giants of the industry once reporting record profits are now struggling to stay afloat and others are on the verge of filing bankruptcy. So why the sudden fallout? How can a catalyst in our economy now cause such an economic downturn?
The answer is subprime (less then ideal) home loans, when home loan lenders offer loans to consumers who do no qualify for the best market interest rates. This is often done due to poor credit history or financial adversity. Subprime lending also means that the lendee will pay a higher interest rate then a prime candidate who qualifies for an A paper loan. This is a very risky situation, you are asking someone to pay more for a loan that they may not even be able to financially handle. So why would a lender take this risk? The reason is that 25% of consumers fall into the subprime category, which is defined by having a credit rating less then 620. And while the risk is greater the reward is also greater. Lenders can charge higher interest rates and add fees associated to lending to a subprime candidate.
The result of these practices has lead to record foreclosures and with questions on how this could happen and who is responsible. Some are blaming the government for lack of oversight. Others are accusing subprime lenders of predatory lending practices by offering loans that they knew customers could not meet their financial obligations for. Issues have also been brought up with investors investing in subprime lending corporations without due diligence in terms of verifying their portfolios. And these are just a few examples of the finger pointing now being caused by this crisis.
So to stay alive now subprime lenders are borrowing from the Federal Reserve, Citigroup borrowed $500,000,000 according the Financial Times from the Federal Reserve on behalf of clients. It's concerning that corporations can borrow money to offset losses directly associated to risky loan practices. With the financial impact tied to the economy it would be better to first see a clear plan in terms of changing those practices. If you or I made an investment into a risky stock option we would be responsible for the losses associated with that risk.
With that said as consumers it's important to understand how we can protect ourselves. First don't commit to a home loan that you are not financially able to fulfill. Second before acquiring a home loan improve your credit, use a credit agency/advisor if needed but try to get your credit rating above 680 to qualify for the best market interest rates. Third work on lowering your debt to credit ratio get it below 35%, this is ideal to qualify for a good loan. Below are the criteria for qualifying for an A Paper loan, meaning you will be a prime candidate for the best market interest rates for your home loan.
• In the United States, the borrower has a credit score of 680 or higher
• The borrower fully documents their income and assets
• The borrower's debt to income ratio does not exceed 35%
• The borrower retains 2 months of mortgage payments in reserves after closing
• The borrower injects at least 20% equity
This article regarding home loan lenders has been provided by www.equityloanfinder.com. It's meant to inform consumer regarding the risks of subprime lending practices.
Article written by Richard L McCaffery
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