Oct 05, 2007

I'm a Subprime Borrower: What Do I Do Now?

Recently we talked about the subprime loan, a.k.a. the new scarlet letter. If you've seen your credit score (and made sure everything on your report is accurate--mistakes do happen!) or heard from a mortgage broker that you're a subprime borrower, what can you do?

One option: wait. Older credit history has less weight that more recent history, so if you spend some time diligently paying your bills promptly and don't open new lines of credit, you may see your score rise. At the same time, save what you can for a down payment (100% financing isn't as easily available as it once was). Of course, in a growing market you're losing the opportunity for increased equity, and interest rates could rise. Given the condition of today's real estate market and the relative stability of rates in recent months, the risk may be worth it.

Another option: check other lenders. You may be able to qualify for a loan if you work with a portfolio lender--that is, one that originates and keeps your loan, rather than selling it on the secondary market. That's because your loan won't necessarily have to meet the strict financial criteria lenders in the secondary market require. More creatively, keep family and friends in mind--sometimes they're willing and able to finance part or all of your purchase. Using CircleLending, you can set up a mortgage that's formal and legal.

One thing to do no matter what is resist temptation, especially in the form of adjustable rate mortgages with monthly adjustment periods or option payments. A hard lesson for many buyers in recent months: Sometimes, you just can't afford it. If you get offered a loan with an adjustable rate, find out how much your monthly payment will be at the full-adjusted rate--make sure the calculation includes principal, interest, taxes, and insurance (PITI), because you'll be paying all four--and how quickly, and over what time period, that adjustment can happen. If you can't afford it now, what's going to change in the next couple months?

Finally, don't count on a bailout from the federal government. The assistance plan President Bush announced recently will only apply to an estimated 80,000 borrowers. While proposed legislation may help avoid problems in the future, it won't necessarily get you out of hot water now.

To learn more about strategies for wrangling your finances during the subprime fiasco, I recommend Solve Your Money Troubles: Get Debt Collectors Off Your Back & Regain Financial Freedom, by Attorney Robin Leonard (Nolo).

Alayna Schroeder