By Writer for Hire 21 March 2014

Much maligned due to much abuse the subprime loan is making a comeback. Although the numbers are small, miniscule in comparison to those of the previous decade, home loans for buyers with minor credit issues are slowly returning to the market. According to the latest reports there are at least a handful of non-bank lenders and at least one major banking institution, Wells Fargo, who are making these loans available which fill the needs for people who have marginal credit including scores which do not meet the Fannie Mae and Freddie Mac minimums of 640.

Subprime loans are so-called because they offer loans to people who cannot qualify for traditional loans. Also known as non-prime mortgages this financing solution is making a comeback to fill a need in a growing number of buyers including first time home buyers with limited credit and buyers who owned a home previously but lost it due to foreclosure or short sale in the recent real estate bust. Because the Federal Housing Administration has recently increased fees and made modifications to the qualification process for an FHA home loan this solution is gaining more traction.

It is important to note the difference between these mortgages and those so abused during the real estate bubble which caused so many problems, the so-called “toxic loans”:

• The rates are fixed, not adjustable

• There is no pre-payment penalty

• Income must be fully verified, not stated

• Rates cannot increase because of missed payments

Qualification for subprime loans is generally not any different from the process for any other loan. Income and assets must be verified and demonstrate the home buyer's ability to repay the loan. Every transaction requires a standard, uniform home appraisal to confirm value to the lender and buyer, too. Where a major difference may be seen is in the required down payment, from the home buyer's own funds or a non-loan gift from a family member or other acceptable donor, and in the interest rates. Because interest rates are so low at this time on traditional loans the 6%, 8% or even 10% interest costs on a non-prime home loan may seem astronomical but in comparison to previous years it is well within the range of affordability to someone who needs the loan as a gap filler until they can refinance into a more standard loan with lower rates.

Proper use of these loans is simply another tool for today's home buyer. Because heavy government regulation has changed the face of alternative lending these loans are safer, more desirable and play a tremendous role in helping home sellers get their properties into the hands of deserving buyers who otherwise would not have been able to qualify for the purchase.

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