Sep 13, 2007

The Subprime Loan: The New Scarlet Letter

It's no big secret: defaults on subprime loans are contributing to higher foreclosure rates and tougher lending criteria. But if you're looking to buy, how do you know if you are a subprime borrower? Why doesn't anyone seem to be talking to these borrowers, instead of about them? If you're concerned that you might fall into this category, here are a few tips.

Get your credit score. Though the definition of "subprime" varies from lender to lender, it appears that a credit score below 620 typically qualifies you as "subprime," which means you won't be able to get a loan at the same interest rates available to borrowers with good credit scores. Find out what your score is before a lender does, so you'll know what to expect. In every state you can get a free copy of your credit report, but it won't include your score, which you can purchase for less than $20 from any of the major credit reporting agencies.

Be suspicious. If a mortgage broker or banker says you don't qualify for a 30-year, fixed-rate mortgage, offers you a loan at an interest rate much higher than is generally available, or suggests you get an adjustable-rate or stated income loan, find out why. It's a red flag that you may be a subprime borrower. (These days, it's less likely to happen, given that lending criteria are tighter and interest rates on these loans aren't much lower that those on fixed-rate mortgages.)

Get preapproved. Get peace of mind by getting a loan preapproval, a lender's commitment to make the loan (subject to some conditions, like a satisfactory appraisal of the specific property you want to buy) based on an evaluation of your credit history, debt load, and income. This beats prequalification, which is just an estimate of what you'll ultimately be able to borrow. Getting preapproved forces you to make sure you finances are in order before falling in love with a home you're not qualified to buy.

To learn more about how to get your credit into shape before you start shopping for that all-important "perfect mortgage", check out Credit Repair, by Attorney Robin Leonard (Nolo).

Alayna Schroeder