Aug 10
3
Subprime Mortgages
The news has been filled with “sub-prime” mortgages and their problems. “Sub-prime” mortgages are loans to borrowers who are not the best qualified people for a loan. They are “risky” because the borrower may not be financially sound or deep in debt evidenced by a lower credit score than generally acceptable.
To cover the additional risk, lenders charge higher interest rates, costs and points at closing, or an adjustable rate featuring an exceptionally low introductory rate with a higher rate that kicks in later causing a higher monthly payment.
Sub-prime mortgages are often sold to another financial institution. When the financial drain of extra costs or higher monthly payments is felt by the borrower, defaulted payments occur. The financial institution that is holding the mortgage when then tries to collect the money owed by foreclosing.
Sub-prime loan defaults have caused such a financial drain on financial institutions that the Federal government is considering legislation to delay the foreclosure processing.
The victim of predatory practices by unscrupulous lenders is the borrower. There may, however, be remedies available.
When applying for a loan with a low credit score, and things sound too good to be true, chances are they are. Keep these thoughts in mind:
1. Avoid low introductory rates of interest that will re-set at higher rates after you are “locked-into” a loan.
2. Make certain you can “comfortably” handle not only the payments of principal and interest required for the life of the loan, but also the real estate taxes and homeowners’ insurance that must be paid annually.
3. Watch the term of your loan to make certain that the loan will be paid off in full at the end of the term of payments.
4. Ask to review the settlement statement before the closing so that you know how much you are being charged for the loan. It is unfair for you to be informed at the closing how much the lender is charging you to cover their additional risk.
5. Avoid mortgages that will be sold after your closing. It is unlikely you will have a close relationship with a lender who has purchased your loan as opposed to one with whom you made application and personally negotiated the terms of your loan. This personal relationship becomes especially important when defaults occur.
6. Stay away from aggressive lending products with unrealistic settlement expectations such as on-line loans and 24 hour closings; on-line title searchers and credit bureau title searches.
If you are inexperienced in borrowing money, it is best to work with someone in the lending industry who has a longstanding and solid reputation for fairness and honesty. If you need additional independent help, consult legal counsel to help you through the process. A small fee up front may avoid a financial catastrophe later.
Keith A. Bassi, Esquire
President and Managing Director at Bassi, McCune, & Vreeland, P.C.
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