Mortgage Help   Mortgage Rates Real Estate Credit Foreclosure Tax Mortgage Rates Mortgage Basics Chapter 1: How much house can you afford? Homeownership Should You Buy or Rent Summary   Chapter 2: Adjustable-rate mortgages ARM and a fixed-rate mortgage Fixed-rate mortgages Understanding the key elements Which type of lender is right for you? Other types of mortgages Subprime Summary   Chapter 3: Your credit score Down Payment How lenders set rates Low down payments Mortgage insurance Your mortgage payment Mortgage Points Summary   Chapter 4: The good faith estimate Inspection and Insurance Necessary paperwork for a buyer Other lender paperwork Paperwork and fees Prequalification and preapproval Special circumstances Summary   Chapter 5: Ten questions to ask Turned down for a mortgage Underwriting What lenders ask Summary   Chapter 6:  Understanding the closing process Escrow Summary   Chapter 7: When your mortgage is sold Avoiding foreclosure Paying ahead Payment changes Refinancing Removing mortgage insurance Summary Subprime There are times when getting financing is difficult. For example, credit problems can stop you from securing a mortgage to purchase a home. But don't worry. If your credit issues are minor, you can still qualify for a mortgage. Special lenders, called subprime mortgage lenders, have programs designed specifically for American homebuyers with credit problems. Subprime mortgages are designed for borrowers who have credit scores under 620. Credit scores are a way of ranking the risk associated with a borrower. They range from about 300 to 900, with the majority of Americans falling in the 600s and 700s. If you pay your bills on time and are a good borrower, your credit score will be high. This indicates that you are not at risk for defaulting on a loan. If you are habitually late on your bills, have fallen behind on your debts or unknowingly had your identity stolen, you will have a low credit score. If it is below 620, a subprime mortgage may be your only option. Most lenders will not come out and say that they are "subprime" lenders. That is because it sounds as if they aren't good lenders. You may hear "non-prime" instead, or references to specializing in borrowers with less-than-perfect credit. When you are a borrower with excellent credit, your choices are few. You simply get the going rate for a mortgage. This doesn't vary from lender to lender by much. But if you are a subprime mortgage candidate, offers will vary widely depending on the lender. Each subprime lender uses different means of weighing the risk you are associated with. This is when shopping around for the best deal becomes very important. What makes subprime mortgages different? Any time risk increases, you can be sure that the interest rate increases as well. Subprime loans have higher interest rates. The rate is based on "risk-based pricing," which means that the mortgage's rates and terms are tailored to your circumstances. What goes for one person may not go for you. But what you can be sure of is that the lower your credit score, the smaller your down payment and the higher the number of late payments and delinquencies, the higher your interest rate will go. A subprime mortgage will probably come with a prepayment penalty and a balloon payment, or both. The prepayment penalty is a fee that will be assessed against you if you pay off the loan early. This happens when you either make extra payments to the principal, refinance for a lower-rate mortgage or sell the home. A mortgage with a balloon payment requires the borrower to pay off the entire outstanding principal in a lump sum after a certain amount of time, say five years. If the borrower can't pay the entire amount, he or she will have to refinance the loan or sell the property. Many experts say that prepayment penalties and balloon payments are associated with higher foreclosure rates. The subprime industry says that borrowers receive the opportunity to own a home at reasonable rates in exchange for prepayment penalties and balloon payments. Watch out for predatory lenders Subprime borrowers must watch out for predatory lenders who are looking to cheat those who are desperate. There are several tactics these lenders use, often using several at a time. Some lenders charge outrageous fees to the uneducated borrower, telling the borrower that his or her score is lower than it really is. Many predatory lenders will pressure homeowners to refinance the mortgage frequently. They charge high closing fees for refinancing and roll the costs into the mortgage amount. Over time, the amount owed exceeds the value of the property. Other lenders issue loans without taking into account the borrower's ability to repay it. After all, if the borrower defaults, the lender forecloses and sells the property, often for a profit. Ethical mortgage lenders do not want to foreclose on a property, because they know that foreclosure is a money-losing process in the long run. Lenders make the most money by charging interest and having mortgages paid in full. A predatory lender simply profits by collecting closing fees over and over again, and then ends up selling the house. The best way to protect yourself is to be knowledgeable. Find out your credit score before shopping around for a mortgage. Ask your friends and relatives for who they would use. If you find you need a subprime lender, ask your local bank who they would recommend. Make sure you comparison shop and don't get desperate. Take your time and find the best mortgage for you.