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Subprime Loans

March 7, 2007

*What’s all the buzz about Sub-Prime Loans? A once-optimistic, booming mortgage lending service may be taking a hard fall; and there is wide debate over whether or not sub-prime loans will gain momentum again. Don’t know what a sub-prime loan is? No worries. I’ll give you the 4-1-1 on these loans and the potential impact to you.

What Is A Sub-Prime loan?

We’ve all seen the commercials: No money down to get in your dream home today! Thanks to sub-prime loans, this claim was possible for tens of thousands of people. “A sub-prime loan is one that is designed for people with low credit, and usually requires little cash for a down payment; hence a 100% loan,” explains Danielle Hoston, Principle Broker with Sherman Oaks, CA-based Hoston & Associates Inc.

It’s all in the name – sub-(below) prime(the best). These loans make it possible for people with second-rate credit to get financing for a home mortgage without providing too much financial information ( i.e ., tax returns, financial statements).

Most sub-prime programs require at least a 640 credit score, adds Hoston; but some maybe less than that. For more on credit scores see my October 26, 2006 column – Bills,Bills, Bills . There are several companies that offer these loans, with New Century being the largest lender in the US.

The Crash

The gig is up! Two weeks ago, shares of New Century came tumbling down in the stock market, amid news of large defaults in the sub-prime market. Translation: People with bad credit are defaulting on their loans. “Lenders now want to protect their investments with the loans they furnish. They want to lend money to buyers who are going to make payments and make them on time. With a softer market, these 100% loans are a gamble for the lender and they’re becoming more strict on their conditions as a way to reduce their risk,” explains Hoston.

The New World Order

More than 20 sub-prime lenders have either quit lending or gone bankrupt altogether in the past year. New Century has put a hold on new loan applications, and is reportedly barely surviving with its existing customers. In addition, they are raising standards and asking for two years of tax returns (W-2’s), up to 60 days of current pay stubs, and cash reserves between 4-6 months.

Help A Brother Out

For those who don’t have A-1 credit, there are still financing options to help get your dream home. Ms. Hoston provides the following quick guide for what you can do:

• Credit score 700 or higher – You’re a rare breed, and if you satisfy qualifications of steady income and savings, you will qualify to get the loan programs for people with “good credit” with typical “Prime” lenders. You will receive some of the better interest rates.

• Credit score 650 and 680 – Your chances for 100% financing are still slim. However, you can come close with 95% financing for a mortgage if you have steady income; and/or 5% of the purchase price in reserves in the bank, seasoned (consistently there) for 4+ months.

• Credit Score 650 and below – You’re odds are lot slimer for 100% financing. You will need to have some form of liquid assets (i.e., something that can be converted into cash quickly; like your savings account, money marketing account, etc.) to catch the attention of the lender; in addition to a verifiable job, and a down payment.

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