The infamous real estate recession that occurred about ten years ago shook the financial foundation of the entire country. It also generated a sizeable group of buyers/consumers with less-than-perfect credit profiles. This newly created subset of borrowers with substandard credit profiles can be identified across all socio-economic levels.
When it comes to re-establishing your credit profile, it is best to begin with baby steps. Many financial institutions offer ‘secured credit cards’ – an easy way to begin to reach for a positive credit profile. But be forewarned; Use this secured credit card prudently and cautiously. With a little vigilance, you will soon begin to see your credit score climb slowly and consistently.
Those mortgage loans that are designed to help finance homebuyers with rougher credit profiles are known in the financial world as sub-prime mortgages. The name ‘sub-prime’ effectively describes the purpose of this loan: a buying opportunity for borrowers with credit scores less than conventional requirements. Although still debated, the sub-prime market has often been referenced as the fall guy to the worst recession since the Great Depression – at the end of the 1920’s.
The guiding premise of a sub-prime loan is: The lower a credit score, the more risky an investment for the lender. To balance the reward/risk ratios, lenders compensate for this additional risk by requiring a larger return on their investment – this translates to a higher interest rate, or additional financing fees.
Poorer credit borrowers can anticipate paying a higher rate of interest on their mortgage. It is also likely that the loan they receive is an adjustable-rate mortgage product, rather than a fixed-rate.
The Advantages and Disadvantages of Sub-prime Financing
Most lenders create internal specialized divisions that market and sell specialty programs created when, and if, they recognize a need.
- Obtaining a secured loan creates the easiest and quickest path for reestablishing a damaged credit profile
- Sub-prime Mortgages that are used to consolidate debt often reduce total monthly debt payments, while rebuilding a credit profile
- Increased interest rates
- Less favorable terms than conventional financing
- Prepayment penalties
When given lemons, make lemonade.
Think about it. There are several options to secure to get a loan after a financial hardship hits. Consider this moment in time a golden opportunity to re-establish your damaged credit, and recover from a crushing financial hardship.