Unfortunately, for many, the pool of lenders you can turn to for a subprime home loan has virtually dried up. A subprime home loan is considered very risky and is usually classified as those where the borrower has a credit score of less than 640. Realistically, if you are in this boat, it can seem difficult, if not impossible to find a lender. However, don’t lose hope. There are a few things that can help you pull out of the subprime world.
First, Work Your Ratios: There are two things that can help soften your credit score woes, a low loan to value (LTV) and debt-to-income ratio. Putting greater than 25% down on a home reduces the lenders risk and proves that although you may have had a couple of late payments in your past, you are a good saver and budget your money wisely. Furthermore, choosing to purchase or live in a home that your income can easily support with your current stable income will boast favorably with your lender.
Most lenders have two debt/income requirements. Generally, it is required that your monthly housing payment (including principal, interest, taxes and insurance) not be in excess of 28% of your monthly gross income. It is further required that your monthly housing payment plus all other monthly debt payments not be in excess of 36% of your monthly gross income. Keeping your ratios even lower by choosing a affordable home, keeping credit cards paid off and limiting other debt can definitely help your cause.
Second, Work your Credit Report: Why are you in the subprime home loan category? Did you default on a loan or simply manage your credit in a sloppy manner. If you’ve just been sloppy, you are part of a huge number of similar people. Most people don’t realize that one late payment can knock 50 – 100 points off of a credit score. A couple of those payments can toss a person with great income, a steady job and low debt right down into sub-prime credit.
You may need to take 6 – 12 months to clean up your score. Pull a free copy of your credit report and carefully evaluate what has hurt your score. 40% of your score relates to the last 12 months. Depending upon where you currently stand, making all payments on time for the next year may drive your score up enough to take you out of the subprime home loan category.
Lastly, reduce all credit card debt. If you carry balances on any of your cards, consider paying them off, but at least pay them down to less than 50% of what is available to borrow.
The climate in the lending world has changed, but we all need to adapt. By attending to all of the details and cleaning up your finances, you will gradually find yourself out of the subprime home loan world with its high interest rates, fees and requirements and into the world of traditional, competitively priced lending.