We all know one of the biggest contributors to the down economy lies in the staggering number of foreclosures. Scores of people across the country have been having trouble paying their mortgages. This has sharply elevated the number of people in default on their home loans, creating a domino effect of foreclosures that has lasted for well over a year now.
Find out what’s behind these sub-prime loans that started the problems and discover how so many people got them in the first place. Then get tips on whether you should still aim to buy a house in the future.
The loans that sparked the problem
“Sub-prime loans” have been getting a lot of lip service these days. These are loans that were given to people eager to buy a home before prices headed up, but who weren’t necessarily financially ready.
These high-risk mortgages actually accounted for almost half of all home loans in the last year alone.
What’s interesting to note though, is that borrowers who agreed to sub-prime loans saw them as only a temporary thing. Most home buyers who got in through an adjustable rate mortgage planned to refinance their homes a year after purchase, once the value had improved.
But as we all know, this wasn’t the case. Home values plummeted, leaving borrowers not only without refinancing options but with also with staggering interest rates.
The standard subprime customer
Most of the people who received subprime loans have a few things in common. For starters, they make a middle class income or below. They have little savings to speak of, and in many cases their credit scores are quite low – oftentimes falling lower than 680.
These individuals also had a default payment rate in common. Several had been between 30 and 90 days late on other loans – and sometimes even longer. Essentially, they had a demonstrated history of non-payment or late payment.
The gist behind predatory lending
Having a shaky financial past is nothing to be ashamed of – scores of folks have gone through tough money times only to eventually get a hold of their finances and come out ahead.
What made this particular situation so bad was the fact that lenders – now commonly known as “predatory lenders” – essentially preyed on people with bad money habits.
Subprime loans, many with adjustable rate mortgages, accounted for approximately half of all new mortgages in the last year. In fact, home ownership soared in the last several years, but it turns out at least 50% of this can be attributed to subprime loans.
Why being behind on your mortgage is such a problem
If you look at all the loans available, the default rate for nonpayment is between 4% and 6%. In sharp contrast, the default rate on adjustable rate mortgages is 14.4%. Experts estimate that roughly two million home owners missed at least one payment on their mortgages in the last year.
Mortgage payments are not small things. With scores homeowners defaulting on their loans, the banking industry – short on payments – spiraled down into financial catastrophe, only being saved by the hefty government bailouts that followed.
What lenders are doing to prevent further home loan catastrophe
In response to the outcry against predatory lending, most lenders have raised the acceptable credit score limit and now refuse to make loans to people with poor credit. They’re also now requiring a minimum deposit of 20% of a home’s purchase price rather than lending up to 100% of the home’s value.
Lenders have also given the boot to “no-doc” loans, or No Documentation Loans. These were loans where applicants didn’t even need to prove they had the income they claimed. Along with that, lenders are no longer allowing refinances for people more than 90 days late on a loan.
In fact, 20% of lenders are already publicly increasing their lending standards and many more are expected to follow.
Can you still be a first-time home buyer? How?
The short answer is: Absolutely. The long answer is that it’ll just take a little more work than previously – but the payoff will certainly be worth it. Especially now with home prices lower, it’s a great time to buy a home – provided you’re well-qualified.
Before trekking out to buy your first home, take the time to review your credit history. If you’re not in the 700-range, you’re not going to qualify for the good interest rates. Step back from the home buying challenge and work on improving your credit.
You should also get pre-qualified. Don’t go home shopping and risk falling in love with a house unless you know a bank or mortgage lender is willing to offer you a loan.
The new home buying horizon
Even though it means more effort for people with colorful financial pasts, it’s a very good thing that lenders are cutting out easy lending strategies. This means home owners of the future will be much more likely to retain their homes, even in tough times.
