With all of the real estate news about sub-prime mortgage lenders going bankrupt, I thought it would be a good time to explain what sub-prime mortgages are.

Sub-prime Lender Defined

A sub-prime lender is one who lends to borrowers who do not qualify for loans from mainstream lenders. Some are independent, but increasingly they are affiliates of mainstream lenders operating under different names.

Sub-prime lenders seldom if ever identify themselves as such. The only clear giveaway is their prices, which are uniformly higher than those quoted by mainstream lenders.

There are lenders who offer both prime and sub-prime loans, and one of them is referred to below. For borrowers who aren't sure where they stand, dealing with a lender who offers both has a distinct advantage. They will try to qualify you for prime and only if that fails will they drop you to sub-prime. Lenders who are strictly sub-prime might refer a prime borrower to an affiliated prime lender, but their financial interest dictates otherwise.

Sub-prime Lending Terms 

Sub-prime lenders base their rates and fees on the same factors as prime lenders. For example, rates are higher the lower the credit score and the smaller the down-payment. However, the entire structure of rates and fees is higher at sub-prime lenders to cover the greater risk and higher costs of sub-prime lending.

A higher percentage of sub-prime than of prime loans go into default. Sub-prime lending costs are also higher because more applications are rejected and marketing costs are higher.

Among sub-prime loans that don't default, a higher percentage prepay early. Prepayment penalty clauses are often mandatory, and a high percentage of sub-prime loans have them. On the other hand, escrow of taxes and insurance, which is required in the prime market unless the borrower pays for a waiver, is often not required in the sub-prime market.

In a nutshell this is sub-prime loans. Many people who had loans during the real estate boom of the past couple of years are not able to pay their mortgage notes. This is causing them to have to sell or foreclose. Al of the homes going onto the market is causing an increase in supply. Basic economics lets us know that when there is an increase in supply the demand can not keep up and home prices will fall. How will this last?

There is no telling. Some parts of the country the decline will last longer. In Cabot Arkansas the real estate market is not that bad. Other parts of the country the real estate markets are terrible. The best way to find out how the real estate market is in your area is to ask a real estate professional. If you are looking for real estate in Cabot or anywhere in central Arkansas, I can help. If you would just like to know how the market is I can help you with that also. Email me or visit my Central Arkansas website by clicking the link.

Good Day