Sub-Prime Mortgage Loan - How Sub-Prime Loans Differ From Conventional Loans
Below is a MRR and PLR article in category Finance -> subcategory Mortgage.
Understanding Sub-Prime Mortgage Loans: Differences from Conventional Loans
Overview
Sub-prime mortgage loans offer greater flexibility compared to conventional loans, which are bound by the stringent guidelines of Freddie Mac and Fannie Mae. While conventional loans boast low rates, they come with certain restrictions. In contrast, sub-prime loans provide more options, albeit at higher interest rates.
Conventional Loan Constraints
Conventional loans are appealing due to their low interest rates; however, these rates are accompanied by limitations. Once a mortgage is processed by a financial institution, Freddie Mac and Fannie Mae often purchase these loans, allowing lenders to issue more. Nevertheless, these entities enforce strict rules about the types of loans they acquire.
One major limitation is the cap on loan amounts. For example, in 2006, the cap for a single-family home was set at $417,000, with annual reviews. Additionally, if you borrow more than 80% of your home's value with a conventional loan, you must carry private mortgage insurance (PMI). To qualify, you typically need good credit, cash reserves, and a steady employment history.
Flexibility of Sub-Prime Loans
Sub-prime loans cater to individuals with poor credit or unique financial situations. They can include jumbo loans that exceed conventional loan limits. Those with atypical or unpredictable employment may find it easier to secure financing through sub-prime lenders.
The terms of sub-prime mortgages are determined by individual lenders. For instance, you might secure a zero down payment loan despite a low credit score. Alternatively, by making a substantial down payment at closing, you could access near-market rates. Notably, sub-prime loans don't require PMI, potentially saving you significant premium costs annually.
Choosing the Right Mortgage
Most financial institutions offer both conventional and sub-prime loans, making it easy to seek quotes for each type. To select the best mortgage, take the time to evaluate the numbers. Consider the annual percentage rate (APR) to gauge the total loan cost, and think about future plans, like moving or refinancing. If you plan to repay the loan quickly, avoid hefty application fees for low rates that might not yield long-term savings.
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