A sub-prime lender makes loans to customers who fall into the sub-prime borrower category. These products often include loans which are normally considered to be standard. They are structured for and marketed to borrowers who possess inadequate income, lower credit scores, and a higher debt to income ratio. These borrowers can not qualify with lenders regarded as traditional.
Sub-prime lenders are often willing to issue loans to customers with special circumstances. These include those who possess less documentation of income, high LTV loan to value ratios, and sometimes a combination of the two. This type of lending is considered to be aggressive and overly risky for most traditional financial institutions.
Where mortgages are concerned, sub-prime lenders are still providing basically the same product in the form of a 5/1 ARM adjustable rate mortgage or a 30 year fixed rate mortgage. The main difference is that the rate which accompanies such a product will be considerably higher.
There are other types of mortgage loans that some observers include in this category as well. Among these are negative amortization loans, interest only loans, and non fixed interest rate mortgages. A great number of analysts consider FHA loans to be in the subprime category. This is because their highest allowable LTV is 96.5% while they accept a credit score minimum of 500.
Sub-prime lenders will also make loans for other assets and in other categories besides housing and mortgages. In fact they issue them for practically all financing needs. This includes credit cards, car loans, unsecured personal loans, and student loans.
After the financial crisis that started with sub-prime mortgages, the government enacted a number of laws protecting consumers from these predatory types of finance. It has made it more difficult to find sub-prime house loans since then. There are a great many of the original loans from before the crisis still in existence. Besides this, sub-prime lenders have found means of circumventing them and giving approval to loans that fall into this category.
Borrowers can take many actions to avoid being a victim of a sub-prime lender. Managing credit carefully is among the most important. It is free to check all credit reports for accuracy. Borrowers can fix errors. Consumers should also deal with any defaults or missed payments if they can. Rebuilding credit requires some time, but going through the process will help borrowers to be considered more prime to lenders.
There are many newer lenders these days that are considered to be legitimate. Online searches and online lenders have opened a whole new avenue to consumers trying to avoid sub-prime loans. Some of these online lenders appeal to those with poor credit and still provide acceptable rates.
There are also peer to peer lending services. They can be more flexible with borrowers than the traditional credit unions and banks often are. It is always a good idea to research any lenders which consumers consider before providing them with important personal information or paying any fees.
Borrowers who are struggling to avoid these sub-prime lenders can also look into a co-signer on a loan. It can help credit challenged borrowers to receive approval from a lender which is traditional and offers better rates. These co-signers put their own credit at stake and take a big risk in doing so.