Loan Advice

Prime or Subprime Loan - At What Point Does My Credit Score Force Me Into A Subprime Mortgage Loan?

Do Credit Scores Have That Much Affect On My Interest Rate?

When a loan officer or a lender runs your credit they actually ask 3 credit bureaus to rate and score your credit history and then your score is the middle of the 3 numbers. If you have a 760, a 720 and a 695 score, then your credit score for lending purposes will be 720. However, some lenders will run their own credit request and that can change the score for better or worse depending on what credit reporting company they use.

Anything over 680 points is considered good enough to receive the best rates in the marketplace. Scores between 620 and 680 can still receive the best rates, but the borrower must be able to show adequate income and substantial liquid assets. This is known as a full documentation loan and if your score is between 620 and 680 it is mandatory in order to receive the best rates.

If you are self employed you may not have to document your income if your score is over 680 points and this can be a good thing because you are usually someone who is deducting a sizable portion of their income on the Schedule C tax form. Consequently, you will show far less net income than you actually earn.

If your score is between 680 and 720 and you cannot qualify using the net income of your last two tax returns, be prepared to be charged a modest fee for the privilege of taking out a loan and not having to document your income. However, if your score is over 720, you will probably not be charged an extra fee because such a score is indicative of the fact that you have made every payment on time for the past several years..

If your score is below 620 and you can still document your income and assets then you will be moved into the ALT A category of mortgage lending, which is one step above Subprime. Here the rates are about 1% to 1 1/2% higher than the Prime interest rates. In todays marketplace that would translate to around 7% to 8%. Presently Prime rates are between 5.75% and 6% depending on the lender and the status of the 10 year bond, which determines all prime mortgage rates.

Undocumented loans with 660 to 680 point credit scores will still fall under ALT A. However, if your score is under 660 and you cannot document your income or show substantial assets then you will be moved into the Subprime loan mortgage category.

Loans are available for those whose credit score is under 620, as long as they can show full documentation, but such a loan will also be in the Subprime Mortgage category.

Don't be fooled by the current hype, a suprime mortgage can actually be a good thing, if used for its intended purpose; as a tool for someone to enjoy home ownership, albeit at a high interest rate and monthly payment, while giving the homeonwer some time to: improve their credit scores, increase their income and acquire assets. The strategy here is that after a few years of improving their financial situation, they can once again return to the marketplace and try for a Prime Mortgage Loan

The most important lesson that can be gathered from the current subprime meltdown and the foreclosures that are occurring daily, is that it is critical for a borrower to work with a reputable, professional loan officer., especially if they have poor credit. All too often, those with poor credit are sought out by predatory lenders. Choose your loan officer wisely and you will be on your way to a solid financial future.