They say nonprime mortgages are coming back. In the second quarter of 2017, securitized nonprime loans reached $1.08 billion per CNBC, citing Inside Mortgage Finance. Still, were they ever really gone in the first place? If so, what were they back then?
Instead of being afraid, try to understand the workings and benefits of nonprime mortgages better. One might just be your ticket to financing your first home.
Getting to Know Nonprime Mortgages
Let’s get this out. There’s a difference between nonprime mortgages and subprime mortgages during the housing boom. Although back then, mortgages with little to no documentation were considered nonprime.
You can rest assured that exotic mortgages that caused the housing crash won’t come back anytime soon. The creation of the Dodd-Frank Act called for many layers of vetting for mortgages. Today’s loans have never been more pristine as a result. However, lenders ended up tightening the credit box even for those who are qualified.
If lenders have to triple-check a home loan, they’d do so because of regulations. The process takes time in itself, putting conventional loans further out of reach for some borrowers.
This tightening of traditional mortgage credit plus the rigorous vetting of today’s loans gave rise to nonprime loans.
Fear Not Nonprime Mortgages
Specialist lenders make up the non-prime sector. They have their own guidelines with respect to the nonprime mortgages they are making – a departure from the usual lending standards embodied by qualified mortgages.
See how today’s nonprime loans differ from past subprime loans:
- Credit: Nonprime lenders are well aware that credit scores can hinder a borrower’s loan prospects, even Fannie Mae has eased up its guidelines with respect to disputed tradelines on credit reports. Thus, nonprime lenders can be more accepting of people with bankruptcy or foreclosure records, checking on their income and cash flows.
- Income: Verification of income is a must or strictly enforced as one known wholesale nonprime lender said. This is how they gauge the borrower’s ability to repay.
- Down payment: Nonprime loans have higher down payments than traditional mortgages, say FHA loans with their 3.5% of the purchase price.
- Loan size: You can find jumbo loans for investment properties that usually exceed the conforming loan limits.
Are Nonprime Mortgages Safe?
During the housing boom, anyone can easily take out a loan without the proper underwriting process. Since the borrower’s ability to repay the loan was not examined, it was also easy for loans to fall into delinquency. Foreclosures were initiated that they hit a record-high 81% in 2008 – a whopping 225% increase from 2006.
Angel Oak, a wholesale nonprime lender that expects its nonqualified and nonprime mortgage originations, e.g. stated income, to reach $1 billion this year, notes that down payments represent life savings for most borrowers. The higher the down payment, the bigger the investment.
Thus, borrowers who put bigger down payments as in nonprime loans are more compelled to meet their monthly dues so they won’t lose their investment. This can be an effective deterrent to delinquencies.
Why don’t you give nonprime mortgages a look? Speak with lenders today.