In today's market, subprime mortgage loans - high-risk mortgages that charge a higher interest rate in order to compensate for a borrower's blemished credit record - often seem to be the only choice for someone with a low credit score or late payments who is looking for mortgage solutions. The truth is that there are programs in place that are offered by certain lenders that give this type of borrower another option. One such option, an Alt-A loan program, gives borrowers with less-than-perfect credit scores a chance to take advantage of many of the benefits that are offered to those who do qualify for the standard "prime" loan.
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What are Subprime Mortgage Loans?
Subprime mortgage loans may at first seem like an appealing option to a borrower. He may have previously been told that he did not qualify for a mortgage at all, closing the door to his dream of becoming a homeowner. In some instances, he may then turn to a subprime lender, who can offer a way for him to achieve his goal after all. Subprime mortgage loans were created to give borrowers who may be considered "high risk" an opportunity to own a home. However, many subprime lenders are of the philosophy "Do Less, Make More." They are simply out to sell their product, and they either can't or won't offer the borrower another option, even though other alternative mortgages do exist.
While subprime mortgage loans are offered to borrowers who may have what are considered to be red flags on their credit report, they bring many negatives to the table. Because they are high-risk mortgages, they have higher interest rates and higher closing costs that compensate the lender for its perceived risk in taking on this type of borrower. In addition, many borrowers of subprime mortgage loans will find, when it is time to pay taxes or insurance on their property, that they do not have an escrow account where funds are accrued to pay these items. You would think that a loan made to a person that has shown an inability to make payments on time and handle their finances prudently would mandate escrow accounts. The borrowers may find that they must refinance their loan in order to cover those taxes or insurance. However, prepayment penalties are customary on such high-risk mortgages, leaving a borrower in this scenario in more debt than when he started the process.
In addition, lenders offering such high-risk mortgages will typically not agree to a locked-in price until the day of the closing. This means that the borrower loses out on price protection against the market and may wind up being forced to pay an even higher interest rate on their subprime mortgage loans than was previously discussed.
An Alt-A Loan Program: The Alternative to Subprime Mortgage Loans
So are there other options for borrowers with problematic credit histories beyond subprime mortgage loans? Yes - and one such option is an Alt-A loan program. This alternative to other high-risk mortgages is offered by many lenders and can give certain borrowers another choice when seeking mortgage solutions. Borrowers with a credit score of 600 to 660, who may have a late payment or two in their history, and who have a debt ratio of around 50% (where standard loans require 40%), are likely to be eligible for this type of program.
With an Alt-A loan program, unlike other high-risk mortgages, prepayment penalties are not mandatory, leaving open the ability to refinance more easily at a later time. Lower interest rates than those offered by a subprime lender are available to borrowers, and closing costs are typically lower than subprime loans as well. Even better for the borrower, an Alt-A loan program offers a wider range of payment stream options, from interest-only loans to 40-year terms to buy downs, which can enable the borrower to buy a bigger house than he or she previously thought possible.
Plus, a lender offering an Alt-A loan program will normally offer a longer guaranteed lock period and will even put the rate in writing for a certain period of time. This allows borrowers to know up front just to what they are committing. This can make a very big difference throughout the term of the mortgage, particularly if the borrower does need to refinance at some point in the future, and makes this a better option than subprime mortgage loans and other high-risk mortgages.
Choosing a Lender for Alt-A Mortgages
It is critical to work with a full-service lender that offers a wide range of diverse mortgage solutions, including Alt-A mortgages, rather than one that specializes in just prime or just subprime mortgage loans. This way, borrowers can be sure that they are offered the program that is best for their needs, not the program that is best for the lender's needs. In addition, before committing to working with any lender, the borrower and the mortgage broker should both feel confident that the lender has the resources and the knowledge to answer all questions about alternative mortgages and handle all concerns.
Above all, borrowers should never feel pressured into choosing subprime mortgage loans simply because of their credit history. They should instead be made aware of all of the programs that exist. While subprime mortgage loans may turn out to be a borrower's best bet for home ownership, he or she should be able to make that decision comfortably after exploring all other options for high-risk mortgages. And by understanding the benefits of an Alt-A loan program, borrowers may find that in fact they can have a mortgage with a better interest rate and better protections than previously thought possible.
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