Oh No! Subprime Mortgages Make a Return

Oh No! Subprime Mortgages Make a Return

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Making home buying easier for some consumers.

The housing collapse that began in 2006 and 2007, preceded an overall economic contraction that wiped out trillions of dollars from the US economy. One of the reasons the housing market fell was because lenders wrote loans to consumers with bad or no credit. So-called subprime mortgages drove the collapse and caused regulators to tighten the strings to help prevent an even deeper slide.

Well, one mortgage lender is now back in the subprime lending game a move that is certain to raise eyebrows. Wells Fargo & Co., the largest U.S. mortgage lender, has begun to offer subprime loans again reports Reuters. It is a decision fraught with risks, one that the lender hopes will reverse its own decline in revenue.

Subprime Mortgages

Simply put, subprime mortgages are loans provided to borrowers with lower credit ratings. Those ratings vary, but typically include consumers with a credit score below 600, particularly at 580 or lower.

Lower credit scores mean that consumers do not qualify for conventional mortgages because lenders believe such borrowers have a higher-than-average risk of defaulting on their loans. And to manage their risks, lenders charge higher interest rates to offset the increased risk of defaults.

Subprime Consumers

Consumers typically find themselves in subprime territory when they make late payments on their debt or other obligations (such as utility bills) and that information is reported to the credit bureaus. People that have declared bankruptcy but have begun to repair their finances are also subprime candidates.

If you are not certain where you stand, obtaining your credit score will reveal much. Visit MyFico.com to learn your score — you’ll pay a fee for that service.

You can also monitor your credit by obtaining copies of your credit reports. Consumers are entitled to one free copy of each of their three credit reports annually, from TransUnion, Experian, and Equifax. Visit AnnualCreditReport.com for that information. Review your reports carefully to ensure that the information about you is correct.

Lending Practices

Although Wells Fargo is rejoining a market that it left several years ago, consumers should know that subprime lending won’t come as easy as it once did.

First, Wells Fargo has a credit score floor of 600 in place. That eliminates millions of people who might otherwise seek a mortgage. Second, proof of income is required, something lenders were lax with earlier. Third, borrowers must have low debt levels. These three are among the eight requirements set forth in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, what tightened the previously lax lending requirements considerably.

So, if you are looking for a loan and your credit is not in good shape, don’t expect smooth sailing as you submit your application. Your information will be carefully scrutinized and you may have to provide further documentation as well as a larger down payment to qualify for a loan. Banks may be will to assume a bit more risk, but that won’t come about apart from tougher standards for today’s lenders and borrowers.

See AlsoWill Mortgage Providers Ease Lending Standards?

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Categories: Financing

About Author

Matthew C. Keegan

Matt Keegan is a freelance writer and editor as well as publisher of "Auto Trends Magazine", an online publication. Matt covers campus, consumer, business and financial topics on various websites and weblogs, and has been published in the "Houston Chronicle", "Sam's Club Magazine" and "Wisconsin Golfer".