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Here's What Nobody Tells You About Sub-Prime Mortgage Lending

Well, lately with the US recession it's become a little more clear as to the reality of sub-prime mortgages, and the consequences of getting one if you don't clearly understand what you're getting into...

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Let's begin by first taking a look at the word sub-prime. Over the past couple of years this word has become an everyday part of our vocabulary, many have blamed sub-prime lending as one of the primary causes for the recent financial meltdown. Let's begin first by taking a look at how the dictionary defines this word..

Sub: thing we need to take a look under : beneath : below

Prime: first in excellence, quality, or value.

So basically when applied to lending what we are simply talking about here is loans and or mortgages that are given to folks with less than perfect credit situations. Now the media and the banks would have you believe that all of these individuals are deadbeats and the cause of the recent crisis but I'm here to tell you my friends that is not completely true!

Let me explain, yes there are a very small group of folks who took out these loans/mortgages knowing full well that they would have a very difficult time making the payment and repaying them back. And granted there may be even some amongst them who had no intention of making the payments at all, but the vast majority were everyday folks who due to circumstance beyond their control found themselves with credit situations that left them no other options than sub-prime loans.

These were folks who had every intention of making the payments going in but were on the razors edge in their actual ability to do so. One small misstep in the economy or their personal financial situation and they would be “screwed”, so now you’ve got to ask yourself, if a lender knew this going in why would they grant these folks loans - and it’s simple: “greed”.

The money that the lenders stood to make from them loans was massive and their greed got the better of their judgement, and that’s why we find ourselves in the mess we are in today!

So am I saying that you should never take out a sub-prime mortgage or loan, absolutely not. What I am saying is that before you do so ask yourself the following questions:

1) Is a sub-prime one the only type of mortgage or loan you qualify for? In other words are you absolutely positive that both your credit and present financial situation leave this as the only door for you to take! The first step in confirming this is to know your credit bureau and score. You would be stunned to learn how many borrowers think their credit score is less than it actually is. In most cases they make this assumption without ever checking their actual credit score, something that can easily be done online in a matter of minutes! Fully knowing your credit history and bureau is what’s going to help level the playing field with the lender and save you money!

2) Can I afford the payments? Now many of you are thinking, who would be crazy enough to go into debt not knowing if they can or can’t afford to make the payments you would be surprised! In fact a fair amount of borrowers who get into trouble do so because they don’t have a monthly budget! That’s right, it’s not only this one payment you have to worry about, it’s all of the rest of your financial obligations. Surveys and studies have proven that more than 80% of individuals today don’t have a monthly operation budget, that’s like driving at night without headlights! So before you borrow the money, make the budget!

3) Do I have an exit strategy? Now I’m guessing that you don’t really want to pay the typical high interest rates that sub-prime mortgages and or loans come with forever, right? Sub-prime loans should never be viewed as anything other than short term due to the interest rates, there should always be an exit strategy going in. So what’s yours? How is your credit situation going to improve during the term of this loan so that at the end of it you can get refinanced at normal rates!

And now, two more things you need to do before you sign for that sub-prime mortgage or loan...

1) Shop around! That’s right, you may not believe it but even in your situation you do have some limited choices. Not all sub-prime lenders are created equal, by shopping around you will discover that there is some differences in both the rates, terms and fees. Even though you are not at a position of strength financially, you should still make sure that the terms you are getting are the best possible ones for you and your family.

Since a credit inquiry has to be done by a lender every time you apply for credit, it’s a good idea to let the lender you’re talking to know, that you have a copy of your credit bureau for them to look at. This avoids them having to put “hits” on your credit bureau which ultimately only lowers your overall score. Since lenders are going to want to see your most recent credit report make sure you get a copy at or on the time you start shopping around.

2) Use your own lawyer! Before you sign anything have your lawyer go through things to make sure that you fully understand what you’re signing. Some banks and lenders have their own lawyers and they might say that by using theirs you will save money for legal fees, don’t do it unless you can be assured that this lawyer is acting independently on your behalf, make sure they are working for you and not the lender! The last thing you want to find out one day is that there is “some little clause” in your sub-prime mortgage and or loan that you thought meant one thing, but as it turns out means something completely else! This little extra expense is well worth the “peace of mind”

Well that’s it, follow the tips I’ve just outlined above and put yourself in the drivers seat when it comes to sub-prime mortgages and or loans, good luck!

About the Author:

Kam Brar is a licensed mortgage broker and has been directly involved in the lending industry over the past 10 years, bringing with him a wealth of knowledge and experience. His particular specialty throughout his career has been working with "challenge" customers, where it takes creative financing (and sometimes private loans) to accomplish their goals.

His role with ShangriLoan is that of a consultant and mortgage industry liaison.



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